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Currency Inflation 
nd Public Debts 

An Historical Sketch 

Uy Bdwln U. \. Sell«ni»ii, Plv i 

Caltkmttlii C'Ui'Miilr 
& AlTintt. lUwjh 




•Jt- WfcW VfJlMv 

Currency Inflation 
and Public Debts 

An Historical Sketch 

By Edwin R^(^eligman, Ph.D., LL.D. 

McVickar Professor of Political Economy 
Columbia University 

With a Prefatory Note 

By Alvin W. Krech 

President The Equitable Trust Company 
of New Yor^^ 




Copyright, 1921, by 




\ Page 

'N Prefatory Note by Alvin W. Krech i 

J I. Introduction 7 

^ II. The Eighteenth Century 13 

\ a. The American Colonies 13 

^ b. France 16 

^ III. Great Britain 19 

^ IV. France 22 

^ V. United States , 25 

J VI. Italy 28 

•^ VII. Russia 31 

O VIII. Austria 35 

^ IX. Spain 39 

^^ X. The South American States 42 

a. The Argentine 42 

b. Chile 45 

c. Brazil 46 

d. Other South American States 50 


Q^ XI. Japan 52 

V XII. The Great War 55 

^ XIII. Conclusion 58 


' 1 







1. Continental Bills of Credit. Issues 67 

2. Continental Bills of Credit. Depreciation 68 

3. Issues of Revolutionary Paper Money by the States . . 69 

4. France. Issues of Banknotes under Law 70 

5. France. The Assignats. Circulation 71 

6. France. The Assignats. Depreciation 71 

7. Great Britain. The Bank Restriction 72 

8. Great Britain. The Public Debt 73 

9. France. The Public Debt 74 

10. United States. Depreciation of Greenbacks 75 

11. United States. Price Changes under the Greenback 

Standard 76 

12. Italy. Public Debt and Gold Premium 77 

13. Russia. Paper Money. 1788-1817 78 

14. Russia. Paper Money. 1844-1897 79 

15. Austria. Depreciation of Paper Issues. 1796-1817 . . 80 

16. Austria. Depreciation of Paper Issues. 1 848-1 892 . . 81 

17. Spain. Depreciation of Paper Currency. 1883-1910 . 82 

18. Price Fluctuations of a Century 83 

Bibliography 84 

Prefatory Note 

Currency inflation and public debts form a vexing 
problem which has called forth the liveliest discussion 
not only in the ranks of economists, but also among 
business people who find in the fluctuations of the 
foreign exchanges a constant reminder of the financial 
difficulties which confront the world. In asking Dr. 
Seligman to prepare for our enlightenment an historfcal 
sketch of currency inflation and public debts, we be- 
lieved that a study of the past might well help us to 
understand better present-day conditions. Dr. Selig- 
man's timely paper and his conclusions drawn from the 
lessons of history have encouraged us to present here, 
under the guise of a prefatory note, a few observations. 

I. As is clearly pointed out, there is no such thing 
as a medium of exchange, money or currency which is 
not subject to fluctuations in value; gold, silver, cop- 
per, all fluctuate. Fiat money fluctuates not merely in 
accordance with the laws of supply and demand; the 
determining factor of its fluctuations is to be found 
in the credit of the issuing nation, and as every emission 
of such currency is the consequence of impaired national 
credit, it is, in effect, a step on the road to the possible 
repudiation of existing debts. As a consequence each 
step towards repudiation affects adversely the class 
which has invested its savings in obligations solvable 
in the forced currency, while it has a contrary effect 
upon the debtor class. For instance, the borrower of, 
say, one thousand Austrian crowns which before the 
war represented, we will say, one hundred days' labor, 
may now repay the debt with one day's labor. 

But if such obligations were to be ultimately re- 
deemed at par all the steps previously taken on the road 
to a possible repudiation would have to be retraced. The 
important thing to remember is that, in retracing the 
steps when the currency has been permitted to depreci- 
ate for the length of time and to the extent that has 


taken place in Europe, the debtor class is made bank- 
rupt through the process of reestablishing the value of 
the currency just as the creditor class is injured by the 
depreciation of the currency; but it makes a vast differ- 
ence in democracies, where the majority rules, "whose 
ox is gored." One thing seems clear, however, that, 
intrinsically, lands, buildings and other tangible prop- 
erty are only temporarily and indirectly affected one 
way or the other, inasmuch as their transferable or 
market value merely registers the corresponding do- 
mestic value of the medium of exchange, 

2. The pound sterling would be at parity with the 
American dollar even though not convertible into gold 
(except as affected by the balance of trade), provided 
the British Government debt were in a fair way to pro- 
gressive liquidation. The same is true of the French 
franc. The trouble with these forced issues is that they 
are mere evidences of the fact that the credit of the 
nation is impaired, and it may be argued that the pound 
sterling and the franc will resume their upward trend 
to parity only when and so long as the national debt 
continues to decrease or the national wealth to increase. 

3. A stable currency, that is to say, a currency based 
upon its interchangeable value with gold at parity, 
however desirable, does not seem to be essential to free 
commercial interchange of credits and commodities. 

It is within the experience of the present-day 
banker and exporter that business was safely and con- 
stantly conducted, between Colombia and Mexico, for 
instance, on the one hand, and the United States on the 
other, in spite of the fact that in the case of Colombia 
the value of its paper currency had fallen progressively 
to the extent of 99-ioo's of its gold standard, and in the 
case of Mexico the paper currency had been entirely 
extinguished. The fact is that a country which has no 
currency whatever, or the currency of which is totally 
valueless, can nevertheless conduct and engage in 


foreign trade just so long as it has something to export. 
Under such circumstances the currency used must of 
necessity be foreign currency, and foreign countries can 
deal with the nationals of countries whose currency is 
valueless, and deal safely, so long as the integrity of the 
persons with whom they transact business is sufficiently 
established and those persons are in control of exports 
sufficient to enable them to obtain foreign currency hav- 
ing an established value. This is precisely the method 
now pursued by the Austrian, German or Polish manu- 
facturer who is dependent upon the importation of 
foreign raw materials for the conduct of his business. 

4. The extraordinary currency inflation of the 
various late belligerent governments of Europe is set- 
ting up new and wholly factitious channels of world 
trade. Temporarily at least the trade of those nations 
having currencies nearest to so called parity is being 
violently wrenched from them by the industrial nations 
which are recklessly hurrying along the road to ex- 
treme inflation and financial ruin. The reason for this 
lies primarily in the fact that the purchasing power of 
the depreciated currency is for a time much greater at 
home than abroad during the progress of its deprecia- 
tion, particularly when prices of vital necessities such 
as food, housing and transportation are controlled and 
fixed below cost of production and the government ab- 
sorbs the loss by the further issue of currency. In other 
words, the home currency will buy more labor and 
domestic raw material combined for export purposes 
than the quoted international exchange would lead one 
to believe.* 

^''Owing to the rise in cost of living, agitation for higher wages is general, 
but strikes are few, as 'boom conditions' enable manufacturers to grant 
demands of their laborers. Socialists have presented a plan for compilation 
of regular Federal wage statistics. At the beginning of November the average 
of nominal wages had risen thirteen-fold compared with 1914." — Berlin Cor- 
respondent New York Times, November 21, 1921, At the same time the inter- 
national value of the mark in which the wages are paid was but one-seventieth 
of its value in 1914. 

■J v^ 

*/ J ** ** 


' As to Germany, the question is frequently asked, is 
her progressive inflation part of a sinister scheme to 
avoid obligation, or, as stated by the German Minister 
of Reparation, a catastrophe resulting from the sale of 
the mark as a commodity in order to obtain the neces- 
sary means of affecting the reparation payments? In 
either case, where will it all end, and how can this 
miserable business be brought to a conclusion? An 
English economist, Mr. A. E. Zimmern, in a recent 
article on "Greek Political Thought," says: 

"France, emerging nerve-racked from a fifty years' 
obsession and a five years' nightmare, half dead with 
sorrow and suspense, yet too proud in victory to own 
her weakness, looks round, half defiant, half wistful, 
among her allies for one who can understand her un- 
spoken need, and longing with all the intensity of her 
sensitive nature to be able to resume, in security and 
quietness of mind, the arts and activities of normal life 
in which she has been, and will be again, the Athens 
of the modern world : Germany, tougher in fibre than 
her western neighbor, yet equally shaken and exhausted : 
a land of sheep without a shepherd, rushing hither and 
thither seeking a direction and a Weltanschauung, her 
amazing powers of industry and concentration and her 
rich and turbid life of feeling running to waste for lack 
of channelled guidance." 

How can any nation be expected to clean house and 
start afresh until certain essential conditions have been 
established? Dr. Seligman does not undertake to answer 
these questions. They belong to the realm of politics 
and statesmanship. How, for instance, can France be 
expected to relax her hold upon Germany until she, 
who for over forty years lived under the constant fear 
of invasion ; who suffered most when war occurred and 
invasion came ; until she feels a sense of security either 
through an effective international guaranty or other- 
jvise? Are the statesmen of the Allies equal to the 

• « 


task? Can they lead their peoples to adopt a course of 
conduct which, though vitally necessary, may seem 
(but only at first blush) inimical to self-interest, involv- 
ing as it would the surrender of undoubted rights and 
the assumption of new and unaccustomed obligations? 
• The peoples of Europe are still a-quiver, but in 
spite of righteous anger, in spite of apprehension which 
cannot easily be brushed aside, deeds have been per- 
formed and words have been spoken which we sin- 
cerely hope bear the promise of better times: The 
Italian families welcoming, on the very morrow of the 
armistice, the little famished children of Austria, or 
M. Briand recognizing in Washington Dr. Wirth's 
loyalty and frankness, are gestures of widely differing 
character, significant in showing that real peace is far 
more than the mere formal signing of a treaty. Neither 
should it be forgotten that in Spa, in Wiesbaden, in 
Geneva, the first bricks have been laid for the recon- 
struction of what Signor Nitti so happily termed "a 
whole Europe." Bis vincit qui se vincit in victoria, he 
twice conquers who conquers himsfelf in victory. 

Dr. Seligman's paper is, it must be admitted, not 
conducive to optimism, but to our mind its austere 
and clear outlines convey a lesson which should not be 
missed. The nations surveyed have all, at various 
times, suffered from the most deadly financial and 
economic diseases, but they all survived, in fact all 
of them were flourishing and prosperous on the 
eve of the Great War. Less than one hundred 
years after the stupendous madness of the assignats, 
France becomes Europe's banker; half a century 
after the Risorgimento Italy develops into a power of 
the first rank; Germany a geographischer Begriff at the 
beginning of the nineteenth century, is an ironclad em- 


pirfe at the beginning of the twentieth. . . . The 
greatness of nations is not to be found solely in metallic 
reserves and balancing budgets: The iron fields of Lor- 
raine, the beauty of Paris, the intelligence and courage 
of the men and women in the fields of France, are not 
all these to be put down to France's credit in the Grand 
Livre de la Dette Publique? Italy is electrifying her 
railroads and ere long the water-falls of her own Alps 
and Apennines will give her all the power she needs 
and free her from servitude to the English collieries. 
So astounding an industrial resurrection may well lessen 
the hardships following in the train of the reestablish- 
ment of the depreciated currency. Germany is con- 
fronted with serious perils; given every possible con- 
sideration under the existing treaty, the measure of her 
recovery depends largely upon the qualities of order, 
thrift and discipline to which her nationals have been 
trained for generations, but to this must be added a 
corresponding loyalty to her new political regime which 
thrusts upon the people wholly unaccustomed civic 

Europe must be given a true peace capable of bring- 
ing back faith in the future, without which her most 
strenuous efforts mufst remain sterile. Europe cannot 
live without a peace full of serenity, without good-will 
among its several nations; there is not one nation in Eu- 
rope which can live without the good-will of the other 
nations. Talleyrand said: ''Pour mot, les vrais interets 
de la France ne sont jamais en opposition avec les vrais 
interets de VEurope/' Thus spoke the greatest master 
of French diplomacy, and his splendid dictum should 
be the motto of every diplomat, of every statesman in 
the world : **The true interests of my country are never 
in opposition to the true interests of the world." 

Alvin W. Krech, 

President of The Equitable Trust Company of New York. 

Currency Inflation and 

Public Debts 



Among the problems of private and public finance 
there are three which have recently become of para- 
mount importance : the growing burden of taxation, the 
sudden changes in price levels, and the instability of 
the currency together with the dislocation of the foreign 

The first problem is intimately connected with the 
growth of public indebtedness. The utilization of pub- 
lic credit is essentially a modern phenomenon. Public 
debts do not go back more than a century or two, and it 
is only in very recent times that they figure largely in 
economic life. Public credit has been utilized in in- 
creasing measure not only because modern business life 
lays continually more stress on credit, but also because 
under the dynamic conditions of a rapidly augmenting 
national wealth the weight of a given public debt tends 
gradually to diminish. Public credit is not only a 
natural, but within bounds a salutary, phenomenon. 
Public debts are in reality nothing but anticipated taxes, 
and if the distribution of the holdings of the debt were 
exactly equal to the distribution of the weight of taxa- 
tion, public debts would constitute no burden on the 
community: for every dollar paid by the individual 
in taxes would be compensated by the dollar received 
by him in interest. 

Unfortunately, however, this exact correlation does 
not exist, chiefly for the reason that taxes are derived 
in part from other sources than the income of property. 
The taxpayers in a community are not by any means 
simply the owners of government bonds. The conse- 
quence is that at any given time a public debt may 


constitute a burden on the community. Where the 
debts are relatively large, this burden assumes two 
forms: first, the interest and amortization charges may 
require the imposition of excessive taxes which hamper 
industry and check enterprise, thus diminishing the 
social dividend. Secondly, the public debt may, as at 
present in most of the European countries, consist in 
part of paper money, which in its depreciated state 
adds perceptibly to the economic burden. 

The second problem of urgent importance is that 
connected with changes in price levels. It is needless 
to descant here upon the evils inherent in such changes. 
Whether it be a period of falling or of rising prices, 
whether it be a period of business lethargy or pros- 
perity, there are always certain classes in the community 
whose welfare will be seriously impaired by the insta- 
bility of the price level. Such changes in the price level 
are either periodic or occasional. The periodic changes 
are connected with what we have become accustomed 
to call business cycles, that is, fat years alternating with 
lean in a certain rhythmical movement — a period of 
business prosperity culminating in wild speculation and 
followed by a more or less abrupt industrial depression 
and perhaps a panic. Contrasted with this periodic 
change, we have occasional or more or less sporadic 
changes in the price level. Such changes, again, may 
take the form either of protracted, long-time changes 
or of sudden, short-time changes. The protracted or 
long-time change in the price level is illustrated by the 
so-called revolution of prices in Europe in the seven- 
teenth century, which was due to the opening up of the 
new world and the ensuing immense increase of gold 
and silver. It may be illustrated again by the rise of 
prices that took place in Japan a generation or two ago 
when the old-time economic system was supplanted by 
modern industry and the growth of banks. On the 
other hand, short-time or sudden changes in price levels 



are engendered by such convulsions as war as well as 
by the use of paper money, itself frequently associated 
with the demands of war. 

Of these three forms of price changes, the periodic, 
the protracted and the sudden, only the last interests 
us in this place. For it is primarily in connection with 
this topic that there arises the problem of inflation and 
of deflation. This brings us to a consideration of the 
connection between inflation and instability of the 

In considering then, in the third place, the question 
of currency instability, we must distinguish between 
inflation and the rise of prices. The one is not neces- 
sarily synonymous with the other. Since by the price 
of anything we mean its money value, the general price 
level denotes the values of goods, commodities, and 
services, expressed in terms of money and the medium 
of exchange. An alteration in the general price level 
accordingly means a change in the relation between 
goods (including commodities and services) on the one 
hand and money (including credit) on the other. Obvi- 
ously, however, such a change in the relation may be 
ascribable, in its origin, to either of the two elements, 
the goods or the money. Fluctuations in the general 
price level, in other words, may be due to causes origi- 
nating with the goods or, on the other hand, to causes 
originating with the media of payment. Our recent 
experiences have made us familiar with the fact that 
wars in themselves engender a rise in prices through 
changes in the conditions of production and consump- 
tion. In the Great War, for instance, the ordinary pro- 
duction of commodities was suddenly curtailed by the 
drafting of the workers into the army and by the diver- 
sion of capital and enterprise into the production of war 
materials. On the other hand, the demand for the basic 
products in the metals and the textiles was immensely 
enhanced by the stupendous needs of the government 


and by the gigantic outlay for the unproductive pur- 
poses of war. 

This diminution of supply coupled with the en- 
hancement of demand was the fundamental factor in 
the rise of the price level. But this could of course 
not have been accomplished without a corresponding 
increase in money and the media of payment. To the 
extent that the increase of money and credit kept pace 
with the dislocation in the conditions of production and 
consumption, there was a rise of prices without there 
being any inflation. As soon, however, as this correla- 
tion was disturbed, and the amount of money and credit 
exceeded this point, inflation occurred. For inflation 
means the existence of a currency in a quantity larger 
than is actually needed to carry on business transac- 
tions at a normal price level.* 

But not only must we distinguish between expan- 
sion and inflation; we must also distinguish between 
inflation and depreciation. Where, as in the United 
States during the recent conflict, the increase in the 
media of payment assumed the form first of the growth 
of coin due to the great influx of gold from abroad, and 
later of the expansion of credit rendered possible by 
the adoption of the Federal Reserve system, there was 
inflation without depreciation of the currency. But 
where, as in Europe, the printing presses were utilized 
and paper money was issued in continually greater 
quantities, the inflation associated with the immense 

'^The familiar distinction between expansion (or rise of prices) and inflation 
is well put by Paul Warburg: ''As long as reserve balances are created and 
circulation is issued only against self-liquidating paper, which represents things 
in course of production, and as long as this process is kept within a safe 
relation to gold, there may be more or less acute banking expansion, but there 
would not be any cause to call it inflation. It is when bank loans, reserve 
balances or circulation are being created against things that do not represent 
any tangible value, and gold reserves are disregarded, that we face inflation in 
its classic form." P. M. Warburg "Inflation and High Prices" in Proceedings 
of the Academy of Political Science in the City of New York, vol. ix, no. 1, 
1920, p. 119. 



rise of prices was signalized by a depreciation of the 

Several points, however, deserve emphasis here. 
We must distinguish between paper money proper 
and paper currency. A paper currency may be com- 
posed of convertible bank notes, like our national 
bank notes, or Federal Reserve notes. Paper money 
proper, on the other hand, is government money 
or so-called fiat money. Where government paper 
is redeemable in coin, it does not differ^ in essen- 
tial respects (except in the matter of elasticity) from 
convertible bank notes. When, however, government 
notes are irredeemable, they constitute real paper 
money or fiat money, especially when they are invested 
with the quality of legal tender. In the same way, when 
bank notes become inconvertible and are similarly in- 
vested with the quality of legal tender, they are virtu- 
ally indistinguishable from paper money proper. The 
Continental countries make a more precise distinction 
than we do, in differentiating between what they call 
legal tender and forced tender {cours legal or corso 
legale as compared with cours force or corso forzoso). 
By the cours legal or legal tender of a note they mean 
its legal receivability for taxes or public dues; by cours 
force, or forced tender, they mean the compulsion of 
receivability in payment of private debts. True paper 
money always involves what they call cours force (what 
we call for short legal tender), and this quality may 
apply both to the irredeemable government note and 
to the inconvertible bank note. 

In so far as inflation of the currency with its at- 
tendant excessive rise of prices is due to the issue of 
paper money in the form of either irredeemable gov- 
ernment notes or inconvertible bank notes, inflation is 
equivalent to depreciation of the paper money. This 
depreciation may register itself either in a positive 
premium on gold in the internal transactions of the 



country, or in an alteration in the rate of foreign ex- 
changes, whereby more units of the internal paper are 
required to purchase a given quantity of the foreign 
unit. The difficulty of the problem, however, is found 
in the fact that fluctuations in the rate of exchange are 
due not only to currency inflation but also to alterations 
in the balance of trade. In fact there is often a recipro- 
cal influence between the two. Moreover, the rate of 
depreciation or the amount of the gold premium is 
frequently affected by the psychology of the situation 
involved in the general economic prospects of the com- 
munity and the credit of the government. 

It may therefore be said that while inflation, so far 
as it is reflected in the depreciation of paper money, 
is due primarily to the relative quantity of the issue, the 
depreciation is also influenced by the changes in the 
balance of trade and by alterations in the general eco- 
nomic conditions, including the budgetary situation and 
the balance of revenues and expenditures. This last 
point again is intimately interwoven with the facts of 
the public debt; for it is primarily the increase of the 
public debt, due to the inability of establishing an equili- 
brium between government income and outgo, that is 
responsible for the issue of paper money and therefore 
in part for the inflation. While we must distinguish, 
therefore, between a rise of prices and a depreciation 
of paper money, in the sense that a rise of prices may 
be due to a fall in the value of gold, which may occur 
where there is no paper money at all, it yet remains 
true that where recourse is taken to the issue of paper 
money the dangers of inflation and of depreciation are 
much accentuated. 

Because of this close connection between currency 
inflation and public debts, we propose to present a short 
sketch of the history of these phenomena, in order to 
form a basis for conclusions applicable to the present 
world situation. 




The Eighteenth Century 

A. The American Colonies 

The two earliest examples of inflation are those of 
America and France. The American colonies were so 
ill provided with coin, as a result of the economic con- 
ditions of a primitive community, that each in turn 
experimented with issues of bills of credit or so-called 
banks of paper money. The resulting depreciation 
engendered such a dislocation of trade and commerce 
that the mother country prohibited the further issue 
of these paper bills, in 1751 for the northern colonies 
and in 1764 for all the rest. The prohibition, justifiable 
in itself, was one of the contributing causes of the 

When the colonies declared themselves independent, 
the reluctance to even self-imposed taxation and the 
inadequacy of the help afforded by France and Spain 
led to the resumption, by both the Continental Con- 
gress and the separate states, of the old practice of paper 
issues. The continental bills of credit soon appeared 
in such large quantities that, although invested with 
the legal-tender quality and reenf orced by an attempted 
limitation of prices, there soon ensued great inflation 
and a corresponding depreciation. As appears from 
tables 1-3 in the appendix, within a few years over 241 
million dollars had been issued by the Continental Con- 
gress and a little later the state issues amounted to almost 
210 millions, making a total of over 451 millions. 
In 1780 the Continental issues had depreciated to such 
an extent that they were now redeemed in new bills 
at the rate of 40 for i. The "new-tenor" bills, how- 
ever, soon went the way of the old notes, undergoing a 
progressive decline until by August, 178 1, they were 
worth only 4 for i silver dollar, making the old bills 



worth only i6o for i. The old bills continued to circu- 
late for a time at rates of from 500 or 1,000 for i. 

In the words of an eloquent contemporary: "Like 
an aged man expiring by the decays of nature, without 
a sigh or a groan, it gently fell asleep in the hands of 
its last possessors."* But as Horace White tells us: "A 
truer figure of speech would be that they passed out of 
the world like a victim of delirium tremens."! 

The ravages committed by the paper money were so 
overwhelming as almost to beggar description. In the 
words of a remarkable contemporary: J"Thus fell, 
ended and died, the continental currency, aged six 
years ; the most powerful state engine and the greatest 
prodigy of revenue and of the most mysterious, uncon- 
trollable and almost magical operation ever known, or 
heard of in the political or commercial world. . . . 
Of all things which have ever suffered dissolution since 
life was first given to the creation, this mighty monster 
died the least lamented." 

And as he puts it in another place: "If it saved the 
state, it has also polluted the equity of our laws ; turned 
them into engines of oppression and wrong; corrupted 
the justice of our public administration ; destroyed the 
fortunes of thousands who had most confidence in it; 
enervated the trade, husbandry, and manufactures of 
the country; and went far to destroy the morality of 
our people." 

Another contemporary writes in 1789 as follows: 
**The evils of depreciation did not terminate with the 
war. They extend to the present hour. . . That the help- 
less part of the community were legislatively deprived 
of their property, was among the lesser evils which 
resulted from the legal tender of the depreciated bills 

♦David Ramsay, History of the American Revolution, 1789, vol.- ii, 
chap. xvii. 

tHorace White, Money and Banking. Illustrated by American History. 
Fourth edition, 1911, p. 103. 

tPelatiah Webster, Political Essays, 1791, p. 175, note. 



of credit. The iniquity of the laws estranged the minds 
of many of the citizens from the habits and love of 
justice. The nature of obligations were so far changed 
that he was reckoned the honest man who from princi- 
ple delayed paying his debts. The mounds which gov- 
ernment had erected, to secure the observance of hon- 
esty in the commercial intercourse of man with man, 
were broken down. Truth, honor, and justice were 
swept away by the overflowing deluge of legal iniquity, 
nor have they yet assumed their ancient and accustomed 

And as a later writer adds : "The news gazettes were 
filled with complaints of injustice: ruin and lamenta- 
tion brooded over one portion of the community un- 
heeded by the remainder, which had become enriched at 
their expense. . . America entered upon its career 
of a nation, bankrupt, faithless and perjured; crowned 
with the ruin of her best friends. At the distance of 
nearly a century the wrongs committed at the Revolu- 
tion have not yet ceased to bear their f ruit."t 

The spurious prosperity occasioned by the high 
prices during the war soon vanished and turned into 
the contrary after the collapse of the paper money. 
During the eighties the suffering was extreme. Only with 
the greatest difficulty could the Revolution be brought 
to a successful close; while the ensuing business de- 
pression and universal distress well - nigh destroyed 
the very fabric of the state. So alarming was the situa- 
tion that almost the first thing accomplished by the 
convention which framed the new constitution was to 
prohibit the issue of bills of credit by the states and to 
adopt a provision which was supposed to apply the 
same inhibition to the Federal Government as well. And 
when the national debt was funded in 1790 the remnants 
of the old paper money were accepted at the rate of 

♦David Ramsay, Op. cit., vol. ii, chap. xvii. 

tH. Phillips, Jr., Historical Sketches of American Paper Currency, vol. ii 
(1866), pp. ISO, 176. 



lOO for I. Thus came to an end an inglorious chapter 
in our fiscal history. 

B. France 

In France the eighteenth century witnessed two epi- 
sodes of money inflation. The first was in connection 
with the famous Mississippi scheme of the audacious 
speculator, John Law, who succeeded, in the second 
decade, in securing control of the public finances. The 
paper bills which he issued soon degenerated from 
convertible bank notes into legal tender, irredeem- 
able government paper ; and there were issued of these, 
as appears from table 4 in the appendix, in progres- 
sively larger batches a sum which finally amounted to 
over 3,070 million livres. When, after a period of a 
most unexampled speculation, riotous extravagance, and 
illusory prosperity, the crash came in 1720, France was 
brought to the brink of bankruptcy and multitudes were 
precipitated into the abyss of ruin. As one of the con- 
temporaries puts it : 

My shares which on Monday I bought 
Were worth millions on Tuesday, I thought. 
So on Wednesday I chose my abode ; 
In my carriage on Thursday I rode ; 
To the ballroom on Friday I went; 
To the workhouse next day I was sent.* 

The second episode occurred during the revolution. 
When Montesquieu made his famous report in 1789 
he estimated the public debt of France at about 1,186 
million livres. In the face of this situation and the 
pressing needs of the treasury, Lecouteulx de Canteleu 
proposed the creation of the famous assignats or paper 
money based on the security of the lands of the clergy, 
which had just been confiscated. Although the original 
issue was restricted to 400 million livres, the fiscal pres- 
sure, due to the outbreak of the war, led to continually 

*C/. A. MacFarland Davis, "An Historical Study of Law's System" in 
Quarterly Journal of Economics, 1887, p. 452. 



greater emissions. The forced loan of 1793 of one billion 
which was imposed, as the law read, "upon the selfish 
and indifferent rich,'* proved to be so inadequate that 
the limit of the assignats was now raised in the same 
year to 3,100 millions. Shortly thereafter, however, 
the limit was removed and by September, 1796, the 
issue of assignats had reached the prodigious sum of 
over 45 J^ billions. As in the United States, they had 
been made legal tender and had been accompanied by 
a limitation of prices, known as the maximum. But so 
great were the inflation and the corresponding deprecia- 
tion that when they were replaced by the new bills, 
known as mandats territoriaux, they were redeemed at 
the rate of 30 for i. The new notes, however, soon 
went the way of the old and by the end of the year their 
value vanished completely and they disappeared from 
circulation. The figures of issue and depreciation will 
be found in tables 5 and 6 of the appendix. As in the 
case of the United States, the suffering was incalculable 
and the real burdens were borne by the honest and 

In the words of the most recent historian of the epi- 
sode : "It was now that there appeared in all their gravity 
the innumerable calamities, political, administrative, 
economic, military, moral and social, which inevitably 
follow the ever-growing issue of an irretrievably de- 
preciated paper money: the ruin of the Treasury, 
crushed on the one hand by the insignificance of the 
revenues paid in paper of a nominal value, and, on 
the other, by the growth of the expenditures necessarily 
met (at least in large part) in actual values ; the increas- 
ing difficulty of procuring food, the commodities more 
and more fleeing from a paper sunk so low; impotence 
and inertia of the administration, deprived by the 
worthlessness of this paper of all its means of activity; 
the melting away of the army, gradually destroyed by 
the misery into which it is plunged by the impossibility 



of Utilizing the money, and by the wholesale desertion 
which inevitably follows: the upsetting of fortunes; 
the sudden enrichment of all debtors, except the state, 
and the ruin of all creditors through the payment, in 
illusory values, of sums contracted for and expressed 
in real values; universal demoralization; fever of 
gambling and stock-jobbing taking the place of the 
love of work and the practice of thrift."* 

In the same way the American historian, President 
White, after recounting in detail the various stages 
which led through apparent prosperity to economic 
collapse and utter ruin, describes the final and more 
subtle consequences as follows : * Just as dependent on 
the law of cause and effect was the moral development. 
In city centers came a quick growth of stock jobbers 
and speculators; and these set a debasing fashion in 
business which spread to the remotest parts of the coun- 
try. Then, too, as values became more and more uncer- 
tain, there was no longer any more motive for care or 
economy but every motive for immediate expenditure 
and present enjoyment. So came upon the nation the 
obliteration of the idea of thrift. Luxury, senseless and 
extravagant, set in, and this, too, spread as a fashion. 
To feed it, there came cheating in the nation at large, 
and corruption among officials and persons holding 
trusts ; and while the men set such fashions in business, 
private and official, women set fashions of extravagance 
in dress and living that added to the incentives to cor- 
ruption. Faith in moral considerations, or even in good 
impulses, yielded to general distrust. National honor 
was thought a fiction, cherished only by enthusiasts. 
Patriotism was eaten out by cynicism."t 

The memory of this ill-fated experiment was des- 
tined to preserve France for over a century from the 
repetition of any such scheme. 

*M. Marion, La vie et la mori du papter-monnaie. Paris, 1921, p. 8. 
tAndrew D. White, Paper Money Inflation in France; How It Came, Whai 
It Brought, and How It Ended, 1876. New ed., 1882, p. 44. 




Great Britain 

When the war with France broke out in 1793, the 
situation in England was fairly satisfactory. The pub- 
lic debt, due primarily to the Seven Years' War and the 
American Revolution, was some £239^ millions, and 
the paper currency which amounted to only £11 mil- 
lions in bills of £5 and over, consisted of the well- 
secured notes of the Bank of England and the country 
banks. In the early years of the war, however, the 
revenues failed to keep pace with the greatly augmented 
expenditures and the deficit (£32 millions in 1795 and 
£36 millions in 1796) was made good by borrowing, 
largely from the Bank of England. In 1797 the poor 
crops at home, coupled with the commercial crisis which 
started in Hamburg, created such an apprehension of 
the loss of gold as to lead to the so-called bank restric- 
tion, that is, the Order in Council which restricted or 
restrained the bank from redeeming its notes in specie. 
Thus started the regime of inconvertible paper. 

During the next few years three phenomena dis- 
closed themselves. First, there was an annual budgetary 
deficit which had to be met by the contraction of fresh 
loans. Second, there was a rise of prices due primarily 
to the war which amounted to over fifty per cent by 
the year 1801. The index number, taking the year 1782 
as par, rose, as appears from table 7 in the appendix, 
from 93 in 1792 to 153 in 180 1. Thirdly, notwithstand- 
ing the suspension of specie payments, there was no very 
great increase in the paper currency, so that no deprecia- 
tion appeared. The inflation, such as it was, was not 
primarily due, as yet, to the over issue of paper. 

A few years later, however, the situation changed. 
By 1808-09 an era of speculation ensued and in the 
next few years the deficits were so great as to lead not 
only to a resort to fresh loans, with a consequent rise 



in prices, but also to an increase in the Bank of England 
note circulation, which soon amounted to more than 
double the original issue. By the middle of 1810 the 
note issues were almost £25 millions. The index-num- 
ber of prices now reached the high-water mark of 164 
in 1 8 10. Now also for the first time there appeared a 
premium on gold or, technically speaking, an increase 
in the price of gold. In 1809 the price of gold advanced 
to 90 shillings, which is equivalent to saying that one £ 
of notes would buy only about 107 grains of gold instead 
of the normal 123^4- The excess of the market price 
of gold over the mint price naturally reflected itself 
in the alteration of the foreign exchanges. This altera- 
tion in the rate of exchange was first ascribed by Ricardo 
to its true cause. The famous Bullion Report of 1810 
clearly expounded the relation between the foreign ex- 
changes, the depreciation of the currency and the sus- 
pension of specie payments. Although the government 
did not formally acknowledge the truth of this expo- 
sition, it did henceforth observe a measure of caution 
in the increase both of debt and of paper currency. The 
price of gold, indeed, again advanced in 181 3, as well 
as after the escape of Napoleon from Elba. After 
Waterloo, however, the depreciation of the paper was 

With the gradual recession in the high level of 
prices after the war — the index number falling from 
135 in 1818 to 106 in 1820 — and with the return of 
more normal conditions in the equilibrium of the bud- 
get, it became possible to prepare for the resumption 
of specie payments. This was finally effected in 1821. 
The period of deflation, however, which followed the 
war was inevitably a painful one and, with the excep- 
tion of the year 1818, the five-year period from 1816-21 
was marked by the usual symptoms of business depres- 
sion and discontent. The situation would have been far 
more unsatisfactory had it not been for the transition 



of the economic life to the modern factory system which 
was now fast proceeding in England, and augmenting 
the surplus of production. 

Great Britain, as a result of the war, was saddled 
with an immense debt of over £86 1 millions. An 
earnest effort was made to provide for the gradual 
payment of the debt, but the history of the nineteenth 
century showed that whatever little progress was made 
toward the sinking of the debt was almost completely 
counterbalanced by the resort to fresh loans as the result 
of successive wars. As appears from table 8 in the 
appendix, the debt which had been slowly reduced to 
£769 millions by 1854, shortly before the Crimean War, 
rose to over £808 millions as a result. In the same way, 
while the debt had again fallen to £628 millions by the 
end of the century, the Boer War caused it to rise to 
£770 millions by 1904. In 19 14, just before the out- 
break of the Great War, the debt of Great Britain stood 
at £661 millions, or only about one-fifth less than at 
the conclusion of the Napoleonic wars. Owing to the 
fact, however, that Great Britain had long since learned 
the desirability of financing its wars, to a certain extent 
at least, by taxation, there was never any occasion to 
take recourse to the further issue of inconvertible bank 
paper or irredeemable notes. There were, indeed, 
periods of speculation and high prices alternating with 
periods of depression and low prices. But these changes 
in the general price level were due to the cyclical price 
movements and not to any inflation or depreciation of 
paper currency. From the passage of Peel's Bank Act 
in 1844 up to the outbreak of the Great War the cur- 
rency issues remained on a stable and satisfactory basis. 





France during the nineteenth century did not forget 
her sad experience with the assignats. Napoleon de- 
frayed the expenses of all his wars by levies upon the 
conquered peoples, while the new system of taxation, 
adopted after the revolution, just about sufficed for 
the ordinary expenditures of government. The conse- 
quence was that the public debt increased only very 
slightly. The rentes (i. e. the annuities on the perpetual 
debt inscribed in the grand livre of the debt) amounted 
in 1799 to the insignificant sum of a litle over 46 million 
francs. By 18 14 the debt had grown only slowly to a 
little over 63 millions. At that time, however, a series 
of deficits occurred and the Treaty of 18 15 imposed 
upon France a considerable indemnity, payable to the 
foreigners. The result was that the debt amounted by 
1 815 to almost 1,300 million francs. 

From that time, notwithstanding occasional efforts 
at repayment, the debt gradually increased. In 1825 a 
billion francs were added as an indemnity to the emigres 
of the revolution. The deficits in the ordinary budgets 
accumulated and the war with Spain occurred, while 
Algiers became continually more of a burden. The 
consequence was that in 1830 the capital of the debt 
stood at over three billion francs. From the revolution 
of 1830 to that of 1848 the situation improved, the debt 
being increased by only 12^ millions. Then came, 
however, the revolution of 1848 and the expenses con- 
nected with the abolition of colonial slavery in 1850. 
Moreover, with the advent of the second empire, the 
debt was now largely increased. At first there were a 
series of deficits. Then followed in succession the Cri- 
mean, the Italian, and the Mexican wars. During the 
reign of Napoleon III no less than 199 millions of 
rentes were issued, corresponding to a capital sum of 



almost 6j4 billions. Finally came the sad experiences 
of the Franco-Prussian War, with the 5 milliards in- 
demnity; and this was now followed by a comprehensive 
plan of outlays for canals and railways, so that by 1884 
there had been borrowed within about a decade over 
361 millions of rentes, corresponding to over 7 billions 
of capital. These figures do not indeed represent the 
net increase of the debt, as the various sinking funds 
were continually in operation. But, despite this fact, 
both the funded and the unfunded debt of France 
steadily increased, so that by 1914, just before the out- 
break of the Great War, the French debt amounted to 
over 32J4 billion francs. Only a comparatively small 
part of this represented productive investments, almost 
the whole being due to war or to the accumulation of 
annual deficits. 

During this entire period France was compelled to 
resort to paper money only twice. During the revolu- 
tion of 1848 the temporary embarrassment of the gov- 
ernment led to the suspension of specie payments by the 
Banque de France and the notes of the nine then-exist- 
ing departmental banks were made inconvertible and 
legal tender. In 1849 ^be Banque de France was given 
the monopoly of note issue, but the limit of issue was 
now fixed at 350 millions. By the end of the year this 
was increased to 525 millions. The depreciation which 
ensued, however, together with the successful quelling 
of the revolution, induced the government in August, 
1850, to abolish the legal-tender provision and to restore 
the convertibility of the notes. From that time on, the 
paper currency consisted of the convertible notes of the 
Banque de France. 

The Franco-Prussian War caused a more serious 
situation. In August, 1870, after the government had 
borrowed large sums from the Banque, the bank notes 
were made legal tender. A moratorium was introduced 
and the limit of the notes issued by the bank was gradu- 



ally raised. By the end qf 1871 it was fixed at 2,800 
million francs and by July, 1872, at 3,200 millions. 
Owing to the skill, however, with which the finances 
were managed in the matter of both loans and increased 
taxes, coupled with the marvelous recuperative power 
shown by the French people and the generally satis- 
factory economic situation, the depreciation was very 
slight, never amounting to more than about two or three 
per cent. The gradual improvement of the finances, 
moreover, made it possible to curtail the paper-money 
regime; and in 1878 the legal-tender quality was abol- 
ished and the convertibility of the bank notes restored. 
However, although the cours force (or what we call 
legal tender) was removed, the cours legal, or receiva- 
bility for public dues, was continued. 

France, therefore, emerged from its troubles with 
comparatively few scars. Although, as appears from 
table 9 in the appendix, the public debt grew con- 
tinually larger, its increase was not greatly out of pro- 
portion to the growth of public wealth. As a con- 
sequence, while the future was not entirely without 
concern, the situation at the outbreak of the Great War 
was on the whole well in hand. France, like Great 
Britain, had traversed periods of speculation and de- 
pression, of cycles of high prices and low prices; but 
with the insignificant exceptions of the revolution of 
1848 and the period of the Franco-Prussian war, 
French commerce and industry have had to suffer little 
from the evils of inflation or of deflation. 

France and England are the only important coun- 
tries which were substantially free from such evils dur- 
ing the middle and end of the nineteenth century. For 
almost all other nations have at one time or other suc- 
cumbed. We shall now endeavor to pass in review the 
experiences first of the United States, then of the Eur- 
opean continent, and finally, of South America and 




United States 

After the sad experiences with the continental bills 
of credit, it was generally believed that the dangers of 
irredeemable paper money had been averted by the new 
Constitution. Nevertheless, toward the end of the war 
of 1 812 with England, the proposition was made in 
Congress to issue bills of credit; and had the war con- 
tinued, it is not at all certain what the result would 
have been. In the Civil War, as is well known, the 
difficulties that confronted Secretary Chase in the mat- 
ter both of taxation and of foreign loans were such that 
he saw himself compelled to resort first to the issue of 
demand notes and then at the opening of 1861, after 
the suspension of specie payments by the banks, to the 
irredeemable legal-tender bills soon known as green- 
backs. Although he recanted later on, when he deliv- 
ered his dissenting opinion in the celebrated legal- 
tender cases as Chief Justice of the Supreme Court, 
Secretary Chase succumbed to the usual temptation of 
improvident financiers and at the time declared the 
issue of the greenbacks a necessity. Inasmuch as more 
and more of these were issued and as, above all, it was 
not until much later that an adequate system of taxation 
was provided, depreciation soon set in. Chase, like 
many others, ascribed the premium on gold to the 
machinations of the speculators in Wall Street and it 
was not until later, when the passage of the bill to pro- 
hibit speculative dealings in gold suddenly forced the 
gold premium up to 285, that the futility of the gold law 
was recognized. 

The great rise of prices during the war was, as in 
all such cases, due to three different sets of causes. In 
the first place, we have to note the dislocation of in- 
dustry with a decrease in the number of laborers, many 
of whom had been called to the ranks. To this was 



added the sudden demand for munitions of war. This 
revolution in the conditions of supply and demand 
would alone have explained a great rise in prices. Now, 
in the second place, came the immense war loans and 
the subscription to the public funds by the banks. The 
third reason is to be sought in the issue of the green- 
backs and the consequent depreciation which, as will 
be seen from table lo in the appendix, varied not only 
with the quantity outstanding, but also with the chang- 
ing fortunes of war and the alteration in the general 
credit of the government. The net result was a very 
considerable inflation which, as in every period of 
rapidly rising prices, temporarily masked the evil re- 
sults of irredeemable paper. $ioo in currency were 
worth only $76 at the end of 1862, $62 by February, 
1863, and $39 in July, 1864. The index number of 
wholesale prices, as appears from table 1 1 in the appen- 
dix, rose from 100 in i860 to about 168 in 1863, to 215 
in 1864 ^"^d to 219 in 1865. 

As soon as the war was over, however, these evils 
became so manifest that Secretary McCuIloch was able 
to outline his plan of rapid repayment of the debt and 
of thorough deflation. The debt of the United States 
which had virtually disappeared by 1835 and which 
then — owing to the Mexican War, the acquisition of 
Texas, and the panic of 1857 — had increased to well- 
nigh $75 millions in 1861, now stood in September, 
1865, at the high-water mark of $2,846 millions. The 
government paper of the United States consisted not 
only of the greenbacks to the extent of $433 millions, 
but also of $830 millions of seven-thirty notes and $218 
millions of compound-interest notes, not to speak of 
the temporary certificates. In his famous Fort Wayne 
speech of 1866, Secretary McCulloch discussed the five 
objections usually advanced against deflation. These 
were that it would (i) produce a financial crisis; (2) 
reduce the public revenues; (3) endanger the funding 



operations; (4) embarrass the national banks; and (5) 
affect the rate of exchange and reduce exports. Not- 
withstanding the triumphant manner in which the Sec- 
retary refuted each of these objections, the fall in prices 
which now rapidly ensued and which considerably em- 
barrassed the business community, was ascribed, in part 
at least, to the policy of deflation or, as it was then 
called, contraction of the currency. Had it not been 
for the wise limitation of credit, which was practiced 
by most of the far-sighted business men at the close of 
the war, the drop in prices would have been far more 
catastrophic, perhaps leading even to a great panic. As 
it was, the suffering was notable, with the result that 
during the next few years the sound-money men were 
fully occupied in fighting the "rag-money" or fiat- 
money plans of the inflationists, who soon proved to be 
a formidable political force. 

The ensuing decade may be divided by the panic of 
'73. During the first half, the boom times and the 
speculation which prepared the way for the crisis ren- 
dered possible the rapid reduction of the debt ($612 
millions) and the remission of war taxes, with a re- 
sultant strengthening of the public credit and a fall in 
the gold premium to i lo-i 12. During the second half, 
comprising the lean years after the crisis, the green- 
backs which had been limited to the fixed sum of $346 
millions slowly approached par as the wealth and re- 
sources of the country gradually increased. Finally, 
when a succession of good harvests toward the end of 
the period rendered possible the accumulation of an 
adequate gold reserve, the resumption of specie pay- 
ments was effected in 1 879. Thus came to an end one of 
the most unfortunate chapters in our history, in which 
the United States was ultimately able to extricate herself 
from a path upon which she need never have entered, 
and escape from which was due in the main to the 
gradual development of our immense natural resources. 





No sooner had Italy achieved its unity in 1861 than 
it proceeded to put its fiscal house in order. The most 
urgent tasks were to provide for the construction of 
railways (of which only some 1,600 miles were then 
in existence) and to prepare for the inevitable war with 
Austria. A loan of 500 million lire was accordingly 
negotiated in 1861, calling for an annual interest pay- 
ment of 25H millions. Notwithstanding the increase 
of taxation, it is not surprising that this debt had to be 
contracted on a basis of over seven per cent. A few 
months later, the debts of the former constituent Italian 
states were assumed so that the new Italian common- 
wealth started on its fiscal career with an annual interest 
charge of 144^ millions of lire, representing a capital 
of a little less than 3 billions (milliards). 

During the next few years large deficits were in- 
curred. In 1863 a loan of some .700 millions was 
issued on a 7.34 per cent basis, followed in 1864 and 
1865 by still further loans, the last of which had to be 
contracted on an eight per cent basis. In 1866 the im- 
pending war with Austria created a crisis. A decree 
was issued, authorizing the national Bank of Rome to 
make a large loan to the government and directing the 
Bank of Naples to redeem its notes, including the so- 
called fedi di credito or certificates of deposit. On this 
basis the government now took over the paper and 
declared it legal tender, at the same time augmenting 
the issue to such an extent that by March, 1868, over 
a billion lire were outstanding. The consequence was 
a very considerable depreciation. As a result of the 
war with Austria and the assumption of a part of the 
papal debt, public loans and inconvertible paper in- 
creased from year to year. By 1874, ^^^ toi^l issue of 
the notes of the six leading banks invested with the 



privilege of issue amounted to over 1,560 millions. 
Moreover, as a consequence of the fall in the price of 
silver, there was now added to the depreciation of the 
bank notes a further depreciation of the legal tender 
silver money against gold. 

In 1874 ^ determined effort was made to improve 
the situation. The six banks now formed a consortium 
or union which issued unified consortial notes {biglietti 
consorziali) . These were loaned to the government at 
interest and were made legal tender to the limit of 
one billion lire. The six banks were also given the 
privilege of issuing their own notes to the extent of 
three times the amount of their capital, and of these 
notes 754 million lire were soon issued. These notes, 
although not having the corso forzoso, as had the con- 
sortial notes, nevertheless retained the corso legale or 
receivability for public dues and taxes. 

During the next few years the fiscal situation im- 
proved only slowly. The debt actually increased. 
By 1870, as appears from table 12 in the appendix, 
the capital value of the debt was almost 8 billions 
and by 1876 almost 9 billions, the annual interest 
charge being respectively 394 and 438 millions. This 
increase represented, however, to no inconsiderable 
measure, productive investments; so that there was 
no greater net burden on the community. Moreover, 
by 1 88 1, although the capital of the debt had been 
augmented still further, the annual interest charge was 
only 478 millions, or less than five years before. The 
government now resolved, in 1881, gradually to convert 
the consortial notes into government paper {biglietti 
di stato). Especially in 1083 ^^ proceeded with its en- 
deavor to secure currency reform and to introduce a 
gold standard. 

The confident expectations of the government were, 
however, not realized and the conditions both of foreign 
and domestic politics, coupled with an economic situa- 



tion which reacted unfavorably on the foreign ex- 
changes, made it impossible to carry out the reforms. 
By 1892 the public debt had increased almost to 12 
billions, with an annual interest charge of 573 millions. 
The government now even saw itself compelled to 
decree the irredeemability of the government notes 
and the inconvertibility of the bank notes. This fact, 
coupled with the recurrence of the annual deficits, 
caused a renewed depreciation of the paper money, 
the premium on gold again rising in 1893 ^^ sixteen 
per cent and causing much uncertainty in business 

From 1893 o^j however, the situation began to im- 
prove. Three of the banks of issue were amalgamated 
to form the great Banca d'ltalia so that henceforth the 
only banks of issue were the Italian bank, the bank of 
Naples, and the Sicilian bank. The new bank notes, 
adequately covered by gold, were deprived of their 
legal-tender quality in 1897, and the situation of the 
foreign exchanges was such that the premium on the 
government notes gradually diminished. At the end 
of the century the public debt was smaller than it had 
been in 1894, standing in 1899 at I2j4 billions of capi- 
tal value and 580 millions of annual interest charge. By 
1902 the gold premium had vanished entirely. 

Italy had now finally come into her own and the 
economic outlook became continually more promising. 
Although the capital of the public debt had increased 
to over 13 billions by 1907, the annual interest charge 
had decreased, as a result of the fall in the rate of 
interest, to t^^^ millions. By the outbreak of the Great 
War of 1914, the public debt of Italy amounted to 
about the same sum — only slightly over 13J4 billions, 
while the general economic conditions had materially 
improved and the currency conditions had been on a 
stable basis for over a decade. 





The history of Russian paper money begins in the 
second half of the eighteenth century. It was in 1768 
that a paper issue known as assignat first appeared. At 
that time, under Catharine the Second, there was noth- 
ing but copper money in circulation. The new paper, 
of which only 20 millions of rubles were issued, without 
any legal-tender quality, was at first received with great 
favor. Shortly thereafter, however, came the war with 
Turkey and by 1790 when 100 millions of rubles were 
outstanding, depreciation began. By 1796, when 150 
millions were issued, the silver ruble had risen, as ap- 
pears from table 13 in the appendix, from 100 to 147 
kopeks in paper, i. e., the paper suffered a depreciation 
of almost twenty-five per cent. 

During the Napoleonic Wars continually more 
paper was issued and although it enjoyed neither the 
cours force nor the cours Ugal, the paper ruble at the 
close of the period was now worth only 25 kopeks. The 
legal-tender quality was first affixed to the paper money 
in 1 81 2 and by 18 15 there were over 826 millions out- 
standing. After the resumption of peace the govern- 
ment decided, in 18 17, to set to work to restore currency 
stability. It accordingly issued a loan payable in assig- 
nats. In other words, the government transformed a 
non-interest-bearing debt into an interest-bearing debt. 
By 1824 the outstanding paper was lessened by about 
one-third, and as a consequence, the depreciation which 
had been as much as eighty per cent was now reduced 
to about seventy-five per cent. In order to defray the 
interest on the new debt, however, the government was 
compelled to contract fresh foreign loans. 

The Minister of Finance, Cancrin, seeing the dan- 
ger in these successive foreign loans, now resolved to 
take some energetic steps. In 1827, the paper ruble was 



made receivable for taxes at the rate of 3.6 for i silver 
ruble, thus involving a virtual repudiation of the public 
debt and causing widespread distress in all its custom- 
ary forms, especially when in 1829 ^^^^ principle was ex- 
tended to private debts and the value of the silver ruble 
was definitely fixed at 3^ paper rubles. Finally, in 
1834, it was decided to replace these ruble assignats 
by new government notes known as rubles credits, based 
on the public domain and with a reserve fund in silver. 
During the next few years 596 millions of the old 
assignats were accordingly exchanged for 170 of the 
new credits. By 1848 there were in circulation about 
289 millions of these new government notes, guaran- 
teed by over 100 millions of coin. The consequence 
was a diminution and final disappearance of the gold 

With the outbreak of the Crimean War, however, 
the government was compelled on the one hand to trench 
upon the metallic reserve, and on the other to increase 
the issue of notes. By 1858 the circulation of govern- 
ment notes amounted to 735 millions and the metallic re- 
serve had fallen below 100 millions. The result could 
have been foreseen — a monetary crisis and the reappear- 
ance of a gold premium. The government now resolved 
to attempt to put an end to its troubles by the creation 
of a great state bank, with a monopoly of note issue and 
an ample reserve. The bank began operations in 1861, 
its capital being secured through a large foreign loan, 
as well as through the sale of state domains. As a result, 
the situation looked more favorable. But when the 
Polish Revolution broke out in 1863, it became neces- 
sary to suspend the further redemption of old rubles 
for the new bank notes. The value of the paper ruble 
consequently fell to 83 J/^ kopeks, and it seemed to be 
impossible for Russia to extricate herself from this 
maze of uncertainty. 



During the next decade the further issues of paper 
money fluctuated largely, depending upon the crops and 
the fiscal conditions. Although the paper issues had 
increased to 797 millions in 1875, ^^^ coin reserve had 
also grown to 231 millions, so that the paper ruble was 
still worth about 85 kopeks. Then, however, ensued 
the Turkish War, and by 1879, ^s appears from table 
14 in the appendix, the issue of paper rubles had grown 
to 1,188 millions, and the paper ruble was now worth 
only 63 kopeks. The public debt had also been enor- 
mously increased and the budgetary balance seemed 
impossible of achievement. 

It was not until about 1887 that the financial authori- 
ties endeavored to reestablish currency stability on the 
basis oi 1^2 paper rubles for i silver ruble, that is, a 
repudiation of one-third of the value. But even then 
it took almost a decade to complete preparations ; and 
it was not until the advent of Count Witte that the plans 
were perfected. In the meantime, the protectionist 
policy had put Russian industry partly on its feet, and 
a favorable balance of trade with a continual excess of 
exports enabled the Minister of Finance to amass a large 
metallic reserve. As a result of some rather adroit 
manoeuvering, designed to prevent speculation on the 
exchanges. Minister Witte was able to carry through 
his plans and in 1896 a ukase was issued, making all 
the old paper rubles convertible into coin after 1898 
at the rate of ij4 for i. Thereafter there were to be 
fresh issues only of bank notes, with a guarantee of 
gold. By the end of the century, the growing pros- 
perity of the empire made it possible to reduce the 
outstanding paper to 630 millions, and to provide for 
a marked increase in the specie reserve. 

The adoption of the monetary reform of the nineties 
introduced such stability into the whole situation that, 
when the Japanese War broke out in 1904, the govern- 
ment wisely decided, with a lively recollection of its 



old troubles, to supply its needs through the contraction 
of foreign and domestic loans, rather than through the 
further issue of paper money. As a result, although the 
public debt of Russia continually increased, the im- 
provement in the general economic situation and the 
stability of the foreign exchanges were such as to render 
possible the maintenance of a metallic standard. At the 
outbreak of the Great War in 1914, the public debt of 
Russia amounted to 3,800 millions of rubles, repre- 
sented in no small part by productive assets like the 
railroads. The currency situation, moreover, gave the 
country no further concern. 





Austria was the first of the European countries to 
issue paper money in the eighteenth century. In 1761, 
the Minister of Finance desired to afford the small in- 
vestors an opportunity to participate in the public 
loans. He accordingly issued certificates of 25 and 
100 florins (a florin being worth then about 50 cents) 
bearing six per cent interest. These Treasury certifi- 
cates soon entered circulation as money. Additional 
issues were made in 1769 and 1771 and the interest- 
bearing certificates, having no legal-tender quality, 
circulated at par. In 1795, however, when the war 
with France broke out, the issues were largely in- 
creased. In 1796, when a slight depreciation made its 
appearance, the government thought that this might 
be prevented by declaring the notes legal tender. Nat- 
urally, however, the consequence was just the reverse. 
By 1000, with an outstanding circulation of about 200 
millions, the depreciation now amounted to about fif- 
teen per cent. From now on, the necessities of the war 
caused matters to go from bad to worse, until by 181 1, 
as appears from table 15 in the appendix, the circula- 
tion amounted to 1,061 millions, and a silver florin was 
worth 8H paper florins. 

The outlook was now so dark that after the con- 
clusion of peace in 181 1 Emperor Francis I summoned 
a commission to devise methods of reform. A sug- 
gestion was adopted to replace the outstanding bills 
by new notes called redemption-certificates (Einlos- 
ungsscheine) J on the basis of one new note for five 
old ones. This meant, of course, a virtual repudiation 
of eighty per cent of their value. But when the war 
broke out afresh in 181 2, such large issues of these new 
notes had to be made that by 181 6 they also had lost 
two-thirds of their value. After the final declaration 



of peace in 1815, the conditions of the market were 
reflected in such an extreme depreciation that 100 
florins of the old paper money, now known as WW 
{Wiener Wdhrung or Vienna paper money), were 
declared equal to only 8 florins of the so-called MC 
(monnaie conventionelle or metallic money) — that is 
at a ratio of i to i2j^. 

After this virtual repudiation, with all the usual 
concomitants of distress and injustice, the national Aus- 
trian bank was founded in 181 6 and the outstanding 
government paper was converted into bank notes, 250 
of the WW being receivable for 100 of the MC. The 
process of conversion went on for a few years until the 
troubles in Naples arose. Then, unfortunately, the con- 
version operations had to be suspended and the gov- 
ernment debt to the bank grew rapidly. 

From 1830 to 1848 there was a period of compara- 
tive peace, so that by the latter date over 669 million 
florins of the WW had been retired, leaving less than 
10 millions outstanding. The whole paper circulation 
was thus by this time composed almost entirely of bank 
notes, which stood at par. Now, however, came the 
revolution of 1848, with the aflSxing of legal-tender 
quality to the bank notes and with the issue of several 
kinds of new paper money, known as Munzscheine 
(metallic notes) and Salinenscheine (salt-mine notes), 
some with legal-tender and some without. During the 
next decade, the political situation was such as to pre- 
vent much improvement in the finances and the public 
debt, borrowed primarily from the bank, increased to 
over 315 millions in 1855. A monetary conference was 
now called in 1857 and a great project of reform was 
initiated. But the outbreak of the war with Italy in 
1859 dashed all these hopes to the ground. The legal- 
tender clause was reestablished, immense loans were 
contracted, and great issues of paper money followed, 



The notes which had reached par in 1859 very shortly 
lost twenty-five per cent of their value. 

New efforts that were later made to reestablish sta- 
bility were frustrated by the political situation. The 
war of 1866 again caused immense issues of paper, 
amounting to some 300 millions of ordinary legal- 
tender notes and 100 millions of notes secured by 
real-estate mortgages. The result, as appears from 
table 16 in the appendix, was a renewed deprecia- 
tion of about fifty per cent. The public debt of the 
empire in 1866 amounted to 3,024 millions, over one- 
half being due to the wars, but a large part also being 
a consequence of the current deficits in the budget. 
From 1 83 1 to 1847 the accumulated annual deficits 
amounted to 143 millions, and in the period 1848- 1859 
to 1,232 millions. In 1865 alone the deficit was almost 
60 millions. 

With the comparatively lenient treatment which 
Austria received at the hands of victorious Prussia in 
1866 the situation began to improve. The fiscal affairs 
of Austria and Hungary were separated and Austria 
assumed seventy per cent of the debt, or 2,317 millions. 
The increasing economic prosperity now fortunately 
led to surpluses instead of deficits, and the progress 
was only temporarily arrested by the crisis of 1873. 
After 1078, however, both foreign and domestic poli- 
tics proved to be troublesome and we again enter upon 
a period of deficits, lasting to 1888. 

Now, finally, appeared a marked change for the 
better. From 1889 ^^j ^he prosperity of the country 
was unexampled. Continual surpluses were accumu- 
lated and a favorable balance of trade, with a great 
surplus of exports, enabled the government not only 
to refrain from any increase in the circulation of paper 
money, but also to prepare for a currency reform and 
the adoption of the gold standard, the free coinage of 
silver having already been suspended in 1879. 



The currency reform was carried out by the law 
of 1892, the old florin being halved and the new stand- 
ard being declared a gold crown (Krone). As the 
existing market ratio of silver to gold was 18.22 to 
I, this was accepted as the basis of the conversion. 
The entire paper circulation outstanding at that time 
amounted to 379 million florins of ordinary govern- 
ment notes and 32 millions of Salinenscheine. Of the 
former, Austria assumed as its quota seventy per cent or 
214 millions. At the accepted rate of conversion, this 
amounted to about 283^4 millions of gold; and in order 
to provide a gold fund for the conversion of this paper, 
a loan of 150 millions was contracted. Hungary also 
borrowed 90 millions for its share. 

The process of resumption was rudely interrupted 
by the crisis of 1893. This proved, however, to be only 
a temporary setback, and during the next few years the 
provisions of the law of 1892 were carried out and the 
paper money was gradually reduced. Paper currency 
was henceforth provided by a well-covered issue of 
the National bank of Austria-Hungary. By 1903 all but 
3 millions of the government notes had been redeemed 
and there were left in addition only the well-secured 
Salinenscheine. Within a few years these also were all 
retired. Austria had thus finally extricated herself 
from her financial troubles. From that time until the 
outbreak of the Great War, Austria-Hungary remained 
on a stable gold basis and the debt, which amounted in 
1914 to 18^ billion Kronen, proved to be no insupport- 
able burden. 





Spain has the distinction of being the first country 
to start a bank as well as to issue paper money. The 
bank began operations in Barcelona in 1401, while 
paper money was first issued in 1483 by the Duke Ten- 
della at Alhama to pay the troops. The modern his- 
tory of paper currency dates, however, from 1780, when 
Charles III issued paper notes under the name of vales 
reales in preparation for the war with England. In 
1783, when the national bank was established, these 
vales became convertible bank notes, and enjoyed such 
confidence that they circulated for a time at a premium. 
Unfortunately, the necessities of the war with France 
caused Charles IV in 1793 ^^ change these vales into 
irredeemable government paper, which he now issued 
in such quantities that they soon were received only at 
a discount. By 1799 over 2j4 million pesetas had been 
issued and in that year an attempt was made to bolster 
up their fading value by declaring them legal-tender. 
This device naturally proved to be unavailing and by 
1808 the depreciation amounted to fifty-eight per cent, 
and by 191 1 to ninety-six per cent. 

Confronted by the prospect of almost total collapse 
in the value of the paper, the ministry now decided that 
something energetic must be done. After much dis- 
cussion the government declared itself responsible for 
the payment of the notes as a part of the national debt, 
in the meantime making them receivable for taxation. 
The consequence was a considerable improvement, so 
that by 18 13 the depreciation amounted only to fifty- 
six per cent. 

Finally, after various changes in the legal-tender 
quality, the advent of peace made it possible to attempt 
a definitive solution. In 18 17- 18 the vales were de- 
clared convertible, to the extent of one-third, into con- 



solidated six per cent certificates. Five vales in paper 
were made receivable for one in gold, and the same 
rule was applied to the amounts due for taxes. In other 
words, resumption of specie payments was effected by 
what amounted to a virtual repudiation of four-fifths 
of the outstanding paper debt. The consequent suffer- 
ing was intense, and it took several years to establish 
a new equilibrium of economic life. 

After the recovery, things went along smoothly for 
a time. The old national bank was liquidated in 1829 
and was reconstituted as the Spanish bank of San Fer- 
nando, which received a monopoly privilege of note 
issue. In 1844, however, a few other banks were per- 
mitted to issue notes. The revolution of 1848 caused a 
suspension of specie payments and the bank notes were 
declared inconvertible. The government, however, 
now assumed responsibility for the note issues, declar- 
ing them receivable for taxes and making an endeavor 
gradually to contract the issues. The political troubles 
of the next few years prevented any very marked im- 
provement in the situation. But the remainder of the 
old issue of government notes, which had circulated 
concurrently with the bank notes, were finally redeemed 
in 1 85 1 on the basis of eighty per cent of their value, 
the vales being exchangeable for three per cent con- 
solidated bonds. 

From this time on, therefore, the paper currency 
consisted exclusively of bank notes. In 1856 a free- 
banking law was enacted and during the next decade 
large issues of bank notes of various degrees of excel- 
lence were made, so that by 1864 the twenty-one banks 
had 263 million pesetas of notes outstanding. The po- 
litical troubles had in the meantime caused a great 
increase in the public debt and especially in the foreign 
debt; and in 1864 the crisis was such that the converti- 
bility of the notes of the bank of Spain was suspended. 

It was especially, however, in the next decade that 



the situation became very much worse. In 1874, when 
the bank of Spain was again made a central bank, the 
outbreak of the Civil War led to a great increase in the 
maximum limit of note issues, which were now declared 
receivable in all payments to the state. By 1882 over 
750 millions were outstanding. In the meantime a 
stupendous increase in the public debt had taken place, 
between 1868 and 1873. No less than 3,054 million 
pesetas were borrowed from abroad; and in 1877 the 
foreign debt amounted to 4,379 millions, almost all of 
it having been wasted in the ruinous civil war. 

From that time until the end of the century, both 
the political and the economic situation was exceedingly 
unsatisfactory. Between 1850 and 1899 there were only 
three budgets without an annual deficit. The value of 
the peseta accordingly, as appears from table 17 in 
the appendix, continually fell. Above all, the Cuban 
troubles and the outbreak of the war with the United 
States in 1898 led to an immense increase in the note 
issues of the bank and to prodigious fluctuations of 
foreign exchange. 

It was not until the beginning of the present century 
that an improvement was perceptible. The economic 
condition of the country now slowly bettered itself. The 
industries multiplied in the north and the regulation of 
the budget as well as the stabilization of foreign ex- 
change was gradually achieved, so that the depreciation 
of the peseta slowly diminished. By the time of the 
outbreak of the war of 191 4, when the Spanish debt 
amounted to almost 9^ billion pesetas, the situation 
had become fairly satisfactory; and the currency diffi- 
culties might well have been considered a thing of 
the past. 




The South American States 

The fiscal development of the South American 
states constitutes an interesting chapter in economic 
history. Confronted with the necessity of winning a 
continent and faced with the endeavor, for a long time 
unsuccessful, to secure political stability, the South 
American states form an instructive example of the 
dangers of undue resort to public credit and of cur- 
rency inflation. We shall limit ourselves here to a 
survey of the three most important commonwealths. 

A. The Argentine 

Immediately upon the declaration of independence 
in 1820 the junta at Buenos Aires issued paper notes. 
In 1822 a bank of discount was founded, succeeded in 
1826 by a national bank. The issues of bank notes, at 
first moderate, were soon greatly multiplied by the out- 
break of the war with Brazil and in 1826, by which time 
2,694,000 pesos had been issued, they were declared in- 
convertible, although now guaranteed by the govern- 
ment. Within a few years the continual increase of 
issues caused a depreciation. By 1828 an ounce of silver, 
whose normal value was 16 pesos, was now quoted at 
116 paper pesos. But the flood of paper money went 
on unchecked. By 1835, over 15 million pesos were 
outstanding, and by 1840 a silver ounce was worth 
514 paper pesos. Things now went from bad to worse. 
In 1854 there were outstanding 204 millions and by 
1865, 298 millions. The fluctuations in the foreign 
exchange and in the depreciation of the paper became 

In 1866-67, however, an effort at bettering the situa- 
tion was made. The law of 1866 gave the provincial 
banks power to issue notes and provision was made for 



the gradual redemption of the outstanding paper money. 
In 1867 there was instituted the exchange bureau {offi- 
cina di cambio) which provided for a conversion of 
the paper pesos into coin at the rate of 25 for i — a 
discount almost as great as that of the French assignats 
or the American bills of credit of the Revolution. 

The next few years witnessed an improvement and 
the gradual accumulation of a gold reserve, which 
amounted, by 1873, ^^ ^^er 16 million pesos. But in 
1874 ^^^ Civil War broke out afresh, soon followed by 
a political and economic crisis. The gold reserve of 
the exchange bureau was drawn upon, some of the banks 
failed, and the notes were finally declared inconvertible. 
Thus there was ushered in the second period of paper 
money which lasted from 1876 to 1883. 

The situation was so bad in 1881 that an attempt 
to remedy the troubles became imperative. There were 
over 882 millions of notes outstanding and the troubles 
were further aggravated by the land boom and by the 
issue of paper money in each province. Various laws 
were now enacted, requiring the Bank of Buenos Aires 
to contract its note issue and to replace the old incon- 
vertible legal-tender bank notes by new metallic or coin 
notes within two years at the rate of 25 for i. The out- 
look now appeared more promising and the effort at 
reform was initiated with vigor. By 1884 the 882 mil- 
lions of old notes had been replaced by 61^ millions 
of new notes. Unfortunately the embarrassments con- 
nected with sudden deflation became so acute that by 
the end of the year a fresh panic occurred and in 1885 
the process of conversion had to be suspended. The 
bank notes now again became inconvertible. 

Thus the third period of paper money was intro- 
duced, and a succession of bad years followed. By 1889 
the gold premium even amounted to one hundred per 
cent. In 1887 a free-banking law was enacted, based on 
the principle of guaranteed circulation, which promised 



fairly well. In 1890, however, the revolution took place, 
followed by the crisis in the next year; and the premium 
on gold rose to 346. In 1890, indeed, a conversion office 
{caja de conversion) was opened but in its practical 
operation it turned out to be simply a machinery for 
emitting more paper money. By 1895 the paper in 
circulation amounted to over 296 millions, while the 
public debt had been continually increased to make 
good the annual budgetary deficits. In 1891 the debt 
amounted to 476 millions and as a consequence the 
premium on gold suffered the most erratic oscillations. 

By the end of the century, however, the economic 
situation took a turn for the better, and the government 
prepared to put its house in order. Owing largely to 
the efforts of Sefior Tornquist a remedy was now found 
in the new conversion law of 1899. The premium on 
gold at that time was 125, the paper peso being worth 
at the market rate forty-four cents in gold. It was 
accordingly provided that all the outstanding notes 
were to be converted into gold at the rate of forty-four 
centavos for i gold peso; or, in other words, at the 
ratio of i to 2.27. More exactly, gold was taken in 
the new law at a premium of 127.27 per cent, but, as it 
was popularly expressed, the price of gold was fixed at 
227.27 per cent in paper. The conversion fund {caja 
de conversion) or gold redemption fund, which was 
later on fixed at 30 millions in gold, was to be ali- 
mented from the import duties, the bank profits, the 
sale of certain railways and various minor sources. 
The favorable conditions of foreign trade permitted 
the gradual execution of the law and thus was accom- 
plished the conversion of all the paper at a premium. 

The ensuing political stability and economic prog- 
ress of the Argentine enabled the government to main- 
tain the gold fund and to ensure the convertibility of 
the paper. Although there was imminent danger of a 
relapse in 1902 -1903, the troubles were soon over- 



come. As a consequence of a persistently favorable bal- 
ance of trade, the Argentine remained in a relatively 
satisfactory situation up to the outbreak of the Great 
War. The public debt had indeed largely increased, 
amounting in 191 4 to over 645 millions. But it is to be 
noted that while the debt was due largely to the early 
political troubles, it was ascribable in part at least to 
the construction of railways. The currency situation 
had, however, so improved that the old era of instability 
may be said to have been definitely surmounted. 

B. Chile. 

The currency troubles of Chile were chiefly of a 
later date. In 1060 a bank of issue was chartered, but 
failed to persuade the public to take its notes. Grad- 
ually, however, the issues were accepted. When the war 
with Spain occured in 1865, ^^^ government, which 
was largely dependent upon the Bank of Chile for sup- 
port, permitted the bank to suspend specie payments. 
In 1866, moreover, the privilege of note issue was con- 
ferred on other banks as well. Although specie payments 
were resumed at the close of the war, this condition did 
not last long. The troubles broke out afresh with the 
crisis of 1878 and the bank notes were made not only in- 
convertible but also legal tender. At this time there were 
in existence eleven banks with over 15 millions of pesos 
outstanding. The outbreak in 1879 of the war with 
Peru and Bolivia, moreover, led the government to is- 
sue its own paper money {billetes fiscales). And no 
sooner had the country started to recover from these 
troubles than the Civil War occurred in 1891, with ad- 
ditional large issues of paper including the so-called 
vales de tesoreria. 

The situation was now so bad that an earnest effort 
was made in 1892 to contract. From 1892, when the 
gold peso was adopted as the standard, to 1895 some 



progress was made. The resumption act of 1895 pro- 
vided for the redemption and incineration of the paper 
at the rate of 10 millions annually; and from 1895 to 
1898 no further paper was issued. From that time on, 
the situation at least did not deteriorate; but on the 
other hand there was no distinct improvement, and it 
was found impossible either to liquidate the largely 
augmented public debt or to provide for a resumption 
of specie payments. 

In 1898, however, the troubles with the Argentine 
broke out, followed by a run on the bank and the dec- 
laration of a moratorium. New government notes 
{billetes fiscales) were now issued to the extent of 50 
millions. The general revenue conditions, however, 
owing to the acquisition of the guano territories, proved 
to be so satisfactory that no additional issues became 
necessary. In 191 2, indeed, a conversion scheme was 
proposed with a gold fund {caja de emission) to en- 
sure the conversion of outstanding notes at the rate of 
1 2d. per peso (the gold peso being worth i8d.). The 
date fixed for the resumption of specie payments was 
soon, however, deferred to 1917 and the outbreak of 
the great war in 1914, with its consequent disarrange- 
ment, prevented the consummation of even this pro- 
ject. In the meantime the public debt of Chile had 
grown in 191 4 to almost 156 millions pesos, internal 
debt, and to well-nigh £34 millions of foreign debt. 
Chile therefore had not been able to extricate herself 
from her currency troubles, and the fluctuation of 
foreign exchange continued almost unabated. 

C. Brazil 

The currency history of Brazil begins in 1808 when 
the bank of Brazil was created, providing the only cur- 
rency in addition to the existing copper coins. Up to 1 8 1 3 
these bank notes remained convertible. But from 18 14 



on, over-issues led to depreciation. The note issues 
amounted by 1820 to over 83^ million milreis {tnilreis 
means a thousand reals) . As a consequence, whereas the 
par of exchange on London had been tyyid. per milreis, 
the rate of exchange after the suspension of specie pay- 
ments in 1 82 1 fell to 47d. When independence was de- 
clared in 1822, the outbreak of the civil war seemed to 
render great additional issues imperative. By 1828 there 
were outstanding over 2iJ^^ millions. Moreover, large 
foreign loans had been contracted from 1825 to 1828 
at a ruinous rate, the five per cent loan having been 
issued at 52. In addition, the troubles with the copper 
coinage multiplied. As a result, the government in 1829 
assumed responsibility for all the bank notes and in 
1833 transformed them into government paper (paga- 
rets thesouron nacional). This paper money, although 
receivable for taxes, was not invested with the legal- 
tender quality until 1835. 

In 1833 a theoretical reform had been attempted, 
with a gold coinage based on a par of exchange equal 
to 433^ d. The regional paper currency was to be with- 
drawn and new paper on a gold basis issued in exchange 
for the old notes as well as for the copper. But the 
project did not succeed. In 1838 a new bank at Rio 
de Janeiro was granted the privilege of issuing notes 
known as vales, bearing two per cent interest, and this 
was soon followed by other bank issues. As a conse- 
quence during this third period, up to 1853, the paper 
currency was composed of a multiplicity of bank-note 
issues together with the government paper money. In 
1 846 another attempt was made to relieve the situation, 
the law providing for the gradual redemption of the 
old paper at the rate of 27d. per milreis, i. e., conversion 
at a discount. As a matter of fact, however, there was 
little if any contraction or conversion. 

In 1853 a new period was ushered in by conferring 
on the Brazilian bank a monopoly of note issue. This 



lasted uhtil the crisis of 1857. At that time there were 
outstanding 43^ millions of government notes and 515^ 
millions of bank notes, or a total of 95^ millions. The 
crisis of 1857, with the attendant great fall in the ex- 
change, led to the adoption of a free-banking law. As 
a result, we have the era of the so-called plurality of 
note issue, which lasted until 1866. The sad conse- 
quences, however, of this experiment led to the act of 
1866 which prohibited the further issue of bank notes 
and provided for a gradual retirement of the outstand- 
ing issues. As a result, from now on until 1889 the 
currency was composed only of government paper 
money in various stages of depreciation. We thus have 
the new period of exclusive fiat money which lasted 
over three decades. In the interval the emancipation 
of the slaves became a burning issue and in 1871 the 
so-called emancipation fund, designed to render possi- 
ble the abolition of slavery was created. By 1888 this 
reached the figure of 24 millions. 

In this year 1888 a new currency system was in- 
augurated by a second free-banking law, which pro- 
vided for a covering of the notes, either in coin or in 
commercial paper. The proclamation of the republic 
of 1889 led to some changes. The law of 1890 per- 
mitted a decided rise in the limit of note issues, of which 
immediate advantage was taken. As a consequence 
there ensued a depreciation so great that by the end 
of 1 89 1 exchange on London stood at about iij^d. in- 
stead of the normal 67j^d. The panic of 1892 led 
not only to the reintroduction of a monopoly of bank 
note issue, but also now again to large emissions of 
government or fiat money. This, together with the 
troubles of the Civil War, brought exchange on Lon- 
don down to 9j4d. By 1894 there were outstanding 
about 367 million milreis of government notes and 345 
millions of bank notes, or a total of 712 millions. The 
situation had now become almost intolerable and, when 



in 1896 the government decided to replace all outstand- 
ing bank notes by fresh issues of fiat money, a panic 
followed and exchange on London dropped to 7d. 

From 1896 on, therefore, we have a currency issue 
composed exclusively of government paper. Since then, 
several efforts have unavailingly been made to amelio- 
rate the situation. In 1899 provision was made for a 
fund designed to serve for the purposes both of guar- 
antee and of redemption; but the crisis of 1900 ren- 
dered this effort abortive. 

In Brazil, as in the other South American states, 
the political difficulties had made it impossible to bal- 
ance the budget, and the deficits, together with the 
military expenses, had caused the accumulation of a 
large debt. Now, however, with the beginning of the new 
century, a gradual improvement in both the political 
and the economic situation ensued and the reestablish- 
ment of the budgetary equilibrium enabled the govern- 
ment to turn its attention to an effort at contraction of 
the currency. By 1903 113 millions of paper had been 
retired and in 1906 an important project of reform was 
adopted. In that year, when there were still outstand- 
ing about 670 millions of paper and when the foreign 
debt stood at £70 millions and the internal debt at over 
552 million milreis, a so-called conversion fund (caisca 
de conversao) was inaugurated. The rate of exchange 
was fixed at i5d. per milreis. The redemption fund 
which was alimented by the proceeds of the import 
duties was designed to redeem only notes issued by the 
caisca itself, differing in this respect from the analo- 
gous Argentine fund, which operates to redeem all 
outstanding paper currency, of whatever character. 

The Brazilian redemption fund did not have quite 
such a successful career as that of Argentine. After 
1908 excessive issues of paper were again made, fol- 
lowed by a depreciation in the foreign gold exchange. 
In 1 910, as a consequence, the exchange rate of the 



caisca was raised to i6d. per milreis, although the 
caisca was directed to accumulate a gold fund equal 
to the difference in the value of the notes resulting 
from the increase in this rate from 15 to i6d. By 191 2 
the convertible notes amounted to almost 333 millions, 
covered by a gold fund of 125^ millions; but the in- 
convertible outstanding paper still amounted to 607 
millions. Moreover, the public debt had constantly 
increased so that it amounted in 19 14 to 979 million 
milreis internal debt, and to £105^ millions foreign 
debt. The situation therefore at the outbreak of the Euro- 
pean War, although far better than in the nineteenth 
century, was still not so satisfactory as in the Argentine. 

D. Other South American States 

Of the other South American states there is room 
to say only a word. Peru started on its career of mingled 
fiat money and inconvertible bank money {vales and 
billetes) in 181 5. They soon lost almost their entire 
value. The experiment was repeated in 1822 and not 
infrequently in subsequent decades. In 1875 when 10 
million soles (a sol equals 2S.) of bank notes were out- 
standing, specie payments were again suspended. Then 
came the war with Chile and the assumption of responsi- 
bility for the paper currency by the government, which 
now proceeded in addition to issue large sums of its 
own. In 1889 an effort was made to put an end to the 
old troubles by issuing new government notes {bonos 
del gobierno) at the rate of 15 of the old for i of 
the new. 

Uruguay also has had a sad experience, the details 
of which it is unnecessary to give here. It may be 
remarked, however, that in 1875 ^^^ legal-tender notes 
were issued in such profusion that gold stood at a 
premium of 857 per cent. 

The worst situation perhaps is found in Colombia 
where the War of Independence in 181 1 led to the issue 



of fiat money which soon lost all its value. After many 
mutations a national bank was created in 1880 with a 
monopoly of note issue ; but a few years later the notes 
were all declared inconvertible. The Civil War in 1899 
led to immense issues of paper, as well as to great 
foreign debts, so that in 191 3 when the debt amounted 
to almost £4 million, foreign, and over 2j4 million gold 
pesos internal, the value of the paper had fallen to the 
extent of 99-100; that is, the paper peso or dollar was 
worth only one cent in gold. 




A history of currency inflation would not be com- 
plete without a short reference to Japan. Although 
paper money issues were known in Japan in the four- 
teenth century, as in China still earlier, it was not until 
the revolution of 1868 that the modern history begins. 
When the Emperor dismissed the Shogun and civil war 
ensued, the government was confronted by a war ex- 
penditure of 25 million yen and an ordinary revenue 
of 3.6 million. While loans and other extraordinary 
revenues brought the revenues up to somewhat over 
9 millions, there still remained a deficit of over 15 
millions. The suggestion was therefore made to issue 
paper money on the alleged security of land, the paper 
to circulate for thirteen years and then to be redeemed. 
On May 25, 1868, this plan was adopted and authority 
to issue 49 million yen was granted. No sooner, how- 
ever, was the paper put in circulation, than it began 
to fall in value and the progressive depreciation was 
not checked by the familiar expedient of declaration 
of legal tender. Nor was the situation much improved 
in the next year when the legal period of redemption 
was reduced from thirteen to five years, in default of 
which the notes were to bear six per cent interest. In 
the meantime, the various warring clans had also issued 
large quantities of irredeemable paper known as clan 
notes, amounting by 1869 to almost 25 million yen. 
Moreover, in addition to the government legal tender 
proper, of which by 1869 there was now outstanding 
50 millions of yen, various other kinds of paper were 
put in circulation, such as the civic department notes 
and convertible notes and certificates issued either by 
the treasury or by the colonial department. 

The consequence was an unexampled rise of prices 
and a period of seeming prosperity upon which the 



new government floated into power. But the ministry 
soon recognized the dangers involved and, after the 
successful outcome of the insurrection, proceeded to 
convert all the outstanding paper, including the clan 
notes, into so-called "new paper notes." A system of 
national banks, based on that of the United States, was 
inaugurated in 1873 ^^^ the banks were permitted to 
issue convertible notes on the deposit of government 
bonds, which were received in exchange for paper 

In 1877, however, the Satsuma insurrection broke 
out and it became necessary to issue additional legal 
tenders. By the end of 1878 there were outstanding 
altogether 1 19.8 million yen of government notes. The 
natural consequence was a great depreciation, a marked 
rise of prices, a considerable excess of imports and a 
corresponding efflux of coin. Things now rapidly went 
from bad to worse. The premium on silver rose to 
twenty-five per cent in 1879, ^^ fifty- four per cent in 
1880, and to seventy-nine per cent in 1881. All the 
familiar earmarks of a period of inflation became visi- 
ble. As we are told by the American consul, T. R. 
Jernigan: "In the year 1881 nearly everything in Japan 
had greatly risen in price, and as the great majority of 
the people considered only price, and not value, and 
ignored the wholly fictitious nature of the advance, it 
is not surprising that they imagined it both solid and 
likely to endure, and thought themselves very pros- 
perous and quite justified in launching into much ex- 
travagant expenditure. Accordingly new farmhouses 
sprang up in every province, new clothes and ornaments 
were freely purchased, land property became in great 
demand and capital was inconsiderably borrowed at 
high rates of interest (and as inconsiderably lent by the 
national banks), and in general everybody rejoiced in 
hope, and a sense of prosperity."* 

^Untied Slates Consular Reports, no. 68, Sept., 1886, p. 6S3. 



Japan was, however, now fortunate in having at the 
helm a great financier, Count Matsukata, who had a 
lively sense of the dangers. He decided upon a triple 
program: an immediate contraction of outstanding 
notes, the accumulation of a gold reserve, and the re- 
placement of the old system of national banks, based 
on the American model, by a central bank, of the 
German type. This policy was at once inaugurated. 
The bank was started in 1882, the gold reserve was 
strengthened and the outstanding irredeemable notes 
were from 1 886 on gradually exchanged for silver. The 
gold premium began to fall in 1884 and by 1886 it had 
completely disappeared, not, however, without the 
usual symptoms of distress. As Mr. Jernigan tells us: 
"Prices, of course, fell as precipitately as they had risen. 
With this fall in prices, distress and desolation extended 
over the land, and millions of people who had supposed 
themselves on the high road to wealth suddenly found 
poverty staring them in the face, while exacting credi- 
tors on all sides demanded the liquidation of debt. De- 
pression and a sense of adversity naturally followed; 
bankruptcies became common and misery was every- 
where present. . . For the present the people appear 
stranded upon a hard and dismal shore. . . But 
necessity is pressing many to exertion, and with an 
enforced return to frugality and diligence, production 
and trade will doubtless gradually revive and prosperity 
finally return."* Count Matsukata, however, persisted 
in his policy, and within a few years Mr. Jernigan's 
prophecies were fulfilled, normal conditions returned 
and Japan entered upon its modern era of progress. But 
the experiences of this unfortunate episode were not for- 
gotten and Japan has since then been preserved from the 
evils of currency inflation. 

*0p. cii., p. 654. 




The Great War 

It is not the design of this paper to trace the cur- 
rency history of the war further than to point out that 
the exigencies of the situation compelled virtually all 
the European belligerents to repeat the errors which 
were committed by Europe during the Napoleonic 
Wars, by the United States in the Civil War, and by 
the South American countries during their various 
periods of tribulation. Everywhere we find the amass- 
ing of gigantic debts and the issue of irredeemable or 
inconvertible paper money, which operated to accentu- 
ate still further the rise of prices and to add the woes 
of inflation to the other evils of war. The United 
States alone was saved from the perils of fiat money, 
not only by its late entrance into the contest, but also 
and more particularly by the fortunate opportunities 
of currency expansion afforded by the new and hitherto 
unutilized Federal Reserve system. Both the United 
States and Great Britain were also in the happy posi- 
tion of being able to rely somewhat more largely than 
the other belligerents on the revenues from taxation to 
defray a small part of the war costs. The result has 
been that while the United States entirely escaped the 
evils of inconvertible paper. Great Britain has suffered 
a somewhat less degree of depreciation than has fallen 
to the lot of the other countries. A summary view of 
the pre-war and post-war public debts of currency 
inflation and of the consequent rise of prices in the 
principal countries is contained in the three tables 
annexed : 



/: Public Debts 

*In million dollars 
Pre-War Post-War Most recent date 

1914 1919 

United States 1,190 25,322 June 30, 192 1 23,977 

Great Britain ZA^S 37>22i June 4, 1921 37>52o 

France 6,291 32,322 March x, 192 1 48,205 

Italy 2,621 15)009 October 3 1» 1920 18,928 

Russia 4,623 125.383 

Belgium 722 1,888 April i, 1921 4>7o6 

Germany 1,126 48,552 October 10, 1921 71,007 

Japan 1,292 1,289 March 31, 1920 1,397 

Argentine 645 823 April 30, 1921 968 

Brazil 1,025 1,190 June i, 1921 1,580 

Chile 198 June 1, 192 1 219 

*Fore|gn currencies converted into dollars at pre-war normal rates. This 
involves exaggerated figures for some of the foreign countries. 
fAs of 1917. 

//. Paper Currencies^ 

(In Millions) 

1913 1920 1921 

United States j8i,o6o Oct. i ^$4,899 Oct. i {84,035 

United States Notes 
Federal Reserve Notes 
Federal Reserve Banknotes 
National Bank Notes 

Great Britain £29 Aug. 1 1 £464 Aug. 20 £426 

Bank Notes 
Currency Notes 

France fr. 5,565 Aug. 30 fr.38,066 Aug. 30 fr. 36,783 

Bank Notes 

Germany mk. 1,990 Aug. 30 mk. 77,087 Oct. 3 1 mk. 92,347 



Italy li. 499 Sept. 30 

Banknotes 1919 H. 16,356 May 31 li. 11 

Government notes 

Japan yen 426 March yen. 1,368 May 31 yen. 1,053 


♦Derived from tables furnished by the League of Nations,United States Treasury 
Reports, and The Financial and Economic Annual of Japan. 



///. Index Numbers of Wholesale Prices* 

IQ13 as TOO 

192 1 

1914 1915 1916 1917 1918 1919 1920 Aug. 

United States 100 loi 124 176 196 212 t^so 152 

Great Britain loi 126 159 206 226 242 ^29$ 183 

Canada loi no 135 177 206 217 246 174 

Australia 100 141 132 155 170 180 ^236 §159 

France loi 137 187 262 339 357 ^526 331 

Italy 95 133 202 299 409 364 t^sS 542 

Germany 100 ti,56o i»777 

Sweden 115 159 233 341 345 322 ^425 §300 

Japan 95 97 117 147 192 236 259 199 

*From Federal Reserve Bulletin^ October, 192 1, p. 1225. 

tAugust. ^ 







From the above survey certain conclusions are 
reasonably clear. 

In the first place most of the existing public debts 
are due, as they always have been due, primarily to 
war. Moreover, the sudden outbreak of war has almost 
inevitably brought about recourse to paper money, in 
the shape either of irredeemable government bills or of 
inconvertible bank notes. The temptation to overissue 
these notes has generally been found to be irresistible 
and has consequently led to inflation with its attendant 
evils. Furthermore, public debts have been increased 
by the accumulated budgetary deficits which have in 
themselves often led to paper money and inflation. 

The inference from these considerations is that fiscal 
progress now everjrwhere imperiously demands a rees- 
tablishment of the budgetary equilibrium. Unless every 
country is willing or able to provide a revenue from 
taxation which will suffice not only for its ordinary 
expenditure but also for the interest and amortization 
of its public debt, we must expect to see a further in- 
crease of the public debt, a renewed emission of irre- 
deemable or inconvertible paper, and a consequent per- 
petually growing inflation. 

In the second place, our survey brings out plainly 
that the issue of inconvertible or irredeemable paper 
money always ends in depreciation. It is true, as was 
pointed out in the introduction, that a distinction must 
be drawn between a general rise of prices and that 
particular rise of prices implicit in the term deprecia- 
tion. But it is none the less true, as our historical sketch 
has shown, that the latter helps to influence the former, 
and that the depreciation caused by the undue resort 
to paper money is no inconsiderable explanation of the 
exaggerated rise of prices that we call inflation. More- 



over, it must be remembered that under modern con- 
ditions of international trade, inflation registers itself 
primarily in the rate of foreign exchange and that these 
fluctuations of foreign exchange cause perturbations 
and embarrassments from which the whole economic 
life of the country severely suffers. 

In the third place, we have learned from our history 
that the worst evils of inflation are often of a subtle 
character. During the period of rapidly rising pricesy 
we have all the appearances of a phenomenal prosper- 
ity. Not only, however, is this prosperity illusory, but • 
it creates it own nemesis in the inevitable reaction 
that is sure to ensue. 

The prosperity, we have said, is illusory. With the 
rapid rise of prices, those who have no commodities to 
dispose of suflFer severely. The creditor is in an un- 
happy position and the recipients of fixed incomes are 
compelled to resort to all manner of unworthy ex- 
pedients in order to make both ends meet. The con- 
tinual fluctuations of price introduce an uncertainty in 
business which is only temporarily masked by the ad- 
vance. The opportunities of a sellers' market irresisti- 
bly lead to profiteering and its attendant evils. The 
sudden increase of the paper income produces private 
extravagance and public prodigality. The extravagant 
rise of wages, even though it lags behind the general 
rise of prices, coupled with the unceasing demand for 
labor, engenders a demoralization, which soon returns 
to plague the industry. The habits of thrift, painfully 
built up during a lifetime, are abruptly discarded. The 
kaleidoscopic mutations of paper fortunes, amassed al- 
most over night, beget a spirit of speculation and of 
peculation. The feverish activity of the market de- 
stroys the habits of orderliness and sobriety, and the 
brilliant prospects of suddenly acquired wealth create 
in the public a delirium of improvidence and the sense 
of living in a veritable golden age. 



The day of reckoning, however, soon follows. When 
the wave rises to a crest, it breaks with an overwhelming 
force ; when the fever subsides, the resulting weakness 
is intense. As the paper finally loses its value, fortunes 
are now suddenly wiped out, and many of the sup- 
posedly wealthy find themselves beggared. With the 
collapse of demand, unsalable stocks deplete the busi- 
ness inventory and failures are the order of the day. 
Those who have habituated themselves to an extrava- 
gant mode of life are faced with the grim necessity of 
immediate retrenchment. The laborer resists to the 
uttermost any lowering of his wages, however neces- 
sary it may be to the reestablishment of the new equili- 
brium. The government finds itself embarrassed by 
the drying up of the sources of its revenue. The pru- 
dent and the patriotic, who have undergone sacrifices 
in order to invest in government paper, suffer for their 
patriotism. The splendors of the former prospects are 
now seen to have been only a mirage. The golden age 
of inflation turns out to have been after all nothing but 
a gilt-paper age. 

Where the abuses have not been so excessive, the 
consequences are not so painful. But the tendency is 
everywhere the same, and the evils are always present 
in some degree. 

The fourth conclusion from our survey refers to 
the disappearance of, or escape from, inflation. This, as 
we have seen, can be accomplished only in two ways: 
through a reduction of the debt or through the contrac- 
tion of the paper issues which we have become accus- 
tomed to call deflation. The only possible methods to re- 
duce a debt are to pay it or to repudiate it. Not a few 
countries, as we know, have resorted to what is virtual 
repudiation by converting a part of the existing paper 
currency at a discount. When the United States finally 
exchanged the remnants of its continental revolution- 
ary bills of credit at lOO for i ; when France took up 



the assignats at 30 for i ; when Russia and Austria, 
Spain and the South American states converted a part 
of their outstanding paper at a fraction of its original 
value : these were all examples of virtual repudiation. 
On the other hand, with the notable exception of the 
United States which was in an especially fortunate 
situation after the Civil War, no country during the 
nineteenth century has made a successful endeavor to 
sink its public debt. 

At the present time, only a few of the recent bel- 
ligerents are dealing seriously with their public debt. 
Italy and Germany, as well as Austria and Czecho- 
slovakia, have adopted the project of a capital levy, 
designed to wipe out a substantial part of the public 
debt by the collection of a large revenue from property. 
Even here, however, the efficacy of the plan has been 
much impaired by the provisions for spreading the 
burden over a long term of years, thus converting the 
capital levy into what is virtually an additional income 
tax. Unless all signs fail, there is little prospect of 
these gigantic debts being paid. As with the nineteenth 
century war debts, they are likely to remaih a perpetual 
burden on the community, the weight of which will be 
lightened only by the gradual increase of wealth and 
prosperity. Unless, however, the greatest care is taken, 
there is serious danger lest the actually existing debts be 
further increased in time of peace, with the probable 
result of total or partial repudiation. 

The second method that has been employed is to 
overcome the evils of inflation by contraction, deflation, 
or conversion. The experiments that have been made 
with contraction in the nineteenth century, however, 
are not such as to inspire us with great confidence. 
For, as we have seen, contraction or deflation, carried 
beyond a certain reasonable point, almost always spells 
commercial embarrassment and business disaster. The 
early effort at contraction in the United States after 



the Civil War was, as a consequence, soon checked. The 
most that can be hoped for at present is a cessation of 
further inflation and a prudent conduct during the 
years of gradual recuperation until a measure of re- 
established confidence and prosperity may render pos- 
sible a conversion of the existing paper money and a 
reintroduction of specie payments. This conversion, 
as we have seen, sometimes takes place at par, after a 
period of probation, as in England in 182 1, in the United 
States in 1879, or in Japan in 1886. In other countries, 
as we have learned, the conversion has taken place at 
a discount which, as we have just pointed out, involves 
a virtual repudiation. Again, conversion has some- 
times been made possible through the adoption of an 
entirely new unit, as in Austria in 1892. Finally, con- 
version has occasionally been aided by an institution 
for special conversion or by a redemption fund, as in 
the Argentine and in Brazil. 

Above all, however, the success of the conversion 
and the possibility of maintaining it in unimpaired ac- 
tivity has been due in almost every case to an improve- 
ment in the general political and economic conditions. 
Just as the public debts, when paid at all, have been 
reduced by an excess of revenues, so inflation to the 
extent that it is connected with the depreciation of the 
rate of foreign exchange has been lessened by a more 
favorable relation between exports and imports. It is 
undoubtedly true that there is a fallacy underlying the 
often accepted doctrine of a favorable balance of trade. 
The old Mercantilist theory that an excess of exports 
is necessarily a benefit and an excess of imports a detri- 
ment is no longer accepted by any careful thinker. For 
an excess of imports may be an indication of prosperity, 
not of adversity. 

In the first place, imports may represent the profits 
of the commercial transactions, the profits being re- 
ceived in the shape of goods rather than of coin or 



credits. While the other party to the transaction will 
presumably also make profits, a surplus of profits ac- 
cruing to any one party to the exchange will frequently 
register itself in an excess of imports. In the second 
place, the imports may represent the so-called invisi- 
ble balance, such as insurance premiums, banking com- 
missions, travelers' outlays, sums belonging to immi- 
grants and, above all, interest on foreign investments. 
Before the war, for instance, Great Britain had a normal 
excess of imports amounting to several hundreds of mil- 
lions annually. On the other hand, some of the poorest 
countries had an excess of exports, the exports repre- 
senting in large part the interest on the indebtedness to 
foreign nations, and thus betokening economic weakness 
rather than economic strength. Students of the prob- 
lem have accordingly long been familiar with the dis- 
tinction between the balance of trade and the so-called 
equilibrium of commerce, the latter meaning such a 
relation between imports and exports as to enable the 
national debits and credits to balance each other. In 
one country the commercial equilibrium may mean an 
excess of exports, in another country an excess of im- 
ports, and not only a temporary but a permanent excess. 
While this is undeniably true, it is none the less true, 
however, that an excess of exports beyond this equili- 
brium point may denote a prosperous condition, and 
that an excess of imports beyond the same equilibrium 
point may imply an unprosperous condition. Such an 
excess of imports may mean the incurring of a foreign 
debt or the necessity of parting with either securities 
or gold. An excess of exports beyond that point, on the 
other hand, may render possible the accumulation of 
foreign credits, the repayment of foreign indebtedness, 
the repurchase of home securities held abroad or the 
amassing of a gold reserve — all of which may be wel- 
come signs. Making due allowance for this distinction 
between the balance of trade and the equilibrium of 



commerce, it is therefore a fact that an excess of ex- 
ports may mean increasing strength and an excess of 
imports growing weakness. In the last instance, there- 
fore, the disappearance of inflation depends not so much 
upon actual deflation as upon the relative deflation 
which is so closely connected with the growth of gen- 
eral prosperity and which is reflected in the relation be- 
tween exports and imports and the rate of foreign 

The final conclusion from our study is that just 
because of the interdependence of all great commercial 
countries in modern times, debt payment and currency 
reform have become international problems. It is not 
by impoverishing Germany, or preventing Poland from 
buying raw materials at what is to them grossly inflated 
prices, that any recovery is to be expected. No one can 
improve his own condition by impoverishing his cus- 
tomers. Nor can countries like Great Britain and the 
United States expect to benefit by an insistence on the 
immediate payment of the debts due to them by the 
Allies. Whatever arguments for the retention of these 
obligations may be advanced from the point of view 
either of possible political pressure or of a guarantee 
against some conjectural economic necessity of the 
future, it is obvious that such gigantic debts can be 
paid at present only through the medium of exports of 
goods from the debtor nations, a process which is bound 
to react disastrously upon the creditor nations by cur- 
tailing their exports. What has already happened to 
Great Britain in the shipping and coal industries is 
symptomatic of the perils attendant upon our pressing 
for immediate or speedy payment of the Allied debts. 

Two things only will make it possible for the world 
to get on its feet again. One is for each country which 
has fallen into the quagmire of fiat money to set its 
face resolutely against further temptations, to reduce as 
far as possible its military and naval expenditures and 



to put its fiscal house in order by a prompt and vigorous 
application of taxation with a view of reestablishing 
budgetary equilibrium. But a taxation as excessive as 
that encountered today even in the United States, not 
to speak of the rest of the world, cannot be continued 
without hazard. No country can long endure the appli- 
cation of so large a part of the social income for purely 
unproductive consumption without suflFering a marked 
retardation in the tempo of its economic progress. For 
it is only out of the setting aside of an appreciable sur- 
plus of annual production that a nation's capital can be 
replenished and the economic resources strengthened. 
Where this surplus is destroyed, or even nibbled into, by 
the conversion of the productive consumption of a nor- 
mal economic life into the unproductive consumption 
of government outlay for military or naval purposes, 
the results are sooner or later bound to be disastrous. 
In the long run, political security cannot be purchased 
at the cost of economic debility. The beginning of 
wisdom is thus obviously some method of limiting arma- 
ments, a result that can clearly be achieved only by inter- 
national agreement. In such an agreement even a coun- 
try like the United States must be prepared for a policy 
of give and take and, if necessary, must be willing to 
recede from its old-time political policy of aloofness 
and isolation. 

But, in the second place, the necessary budgetary 
equilibrium will be made possible only and concur- 
rently with a stabilization of the exchanges. This is 
also from the very nature of the case an international 
problem which must be met by international methods 
that it is not our function here to discuss. 

It is clear then that in the solution of the world's 
present economic and fiscal problems the United States 
must also play its part. The solution can be achieved 
only by a realization of the fact that as this gigantic con- 
flict was universal in its scope and in its eflfects, so the 



remedy must be equally universal in character. Whether 
we desire it or not, we have all become integral parts 
of a stupendous world mechanism, no portion of which 
can cease to function without inevitably aflfecting the 
activity of the rest. The slogan of economic and fiscal 
reform must be: "Set your own house in order, but 
join with your neighbors in setting the world house in 
order/' To this imperious demand practical policies 
must be adjusted; for the sake of this economic neces- 
sity old shibboleths must be discarded and outworn 
political programmes relegated to the dust heap. Not 
aloofness, but constructive cooperation in both politics 
and economics must henceforth become the watchword 
of the United States. 



Continental Bills of Credit. Issues* 

In Millions of Dollars 
1775 June 22 2 

July 25 I 

November 29 3 $6,000,000 

1776 February 17 4 

May 9 5 

July 22 5 

November 2 5 19,000,000 

1777 February 26 5 

May 20 5 

August 15 I 

November 7 i 

December 3 i 13,000,000 

1778 January 8 i 

January 22 2 

February 16 2 

March 5 2 

April 4 I 

April II 5 

April 18 Yi 

May 22 5 

June 20 5 

July 30 5 

September 5 5 

September 26 10 

November 4 10 

December 4 10 63,500,000 

1779 February 3 5 

February 19 5 

April I 10 

May 7 50 

June 4 10 

July 17 15 

September 17 15 

October 14 5 

November 17 10 

November 29 15 140,052,380 

Total 241,552,380 

♦Report of Registrar, James Nourse, to House of Representatives, January 
30, 1828. 



Continental Bills of Credit 

Scale of Depreciation, as fixed in the Massachusetts Act 
of September 29th, 1780.* 

$100 in coin rated as equal in Bills of Credit to 

1777 January $ 105 1779 October 2,030 

July 125 December .... 2,593 

1778 January 325 j^g^ January 2,934 

J^^y 425 February 3,322 

1779 January 742 March 3>736 

July 1,477 April 4,000 

After April i, 1780, i Spanish milPd dollar was equal 
to 40 of the old emission. 

By the Massachusetts Act of November i, 178 1, one 
dollar was to be equal in dollars of the new emission to 

1781 Feb. 27 $1^ June 15 3 

May 1 1% Oct. i 4 

May 25 2J4 

'''From an old Broadside in the possession of the author. 

















00 '^VO NioOVOVO O •-'i^oo 










o a 

VO to 



O *^ 

to VO 


M C< 




VO to VO 

8VO t^ to t^ 
VO to to M 
to to VO t^ M 


8 8 2 

M VO •-• 


t^ 00 

^N. to 

'^ CI 
VO tr% 













C/3 I2; . 


< w 



r^ .0 • • <C w 2 < . ^ 







Issues of banknotes under Law. * 

(In Millions of Livres) 

January 5 18 

February 7 20 

April I 20.9 

April 22 51 

une 10 50 

uly 20 220.7 

September 22 120 

October 24 120 

December 29 359-7 

February 6 200 

March 26 300 

April 5 396 

April 19 436.6 

May I 362.4 

June 26 99.9 

September 2 37 

September 19 50 

September 23 59.9 




♦From A. Courtois, Histoire des banques en France, p. 302. 2d ed., Paris, 1881. 

. : 70 

* • fc • • 
t • . • 


The Assignats in France* 

(Circulation in Million Livres) 

1791 June I 912 

Oct. I 1,151 

1792 Sept. 22 i»972 

1793 Jan. I 2,826 

Aug. I 3,776 

1794 May I 5,891 

July I 6,082 

Oct. I 6,618 

1795 Jan. I 7,229 

Apr. I 8,327 

July I 12,338 

Oct. I 17*879 

1796 Jan. I 27,565 

Apr. I 36,672 

July I 34*509 

Sept. 7 45»579 

The Assignats in France 

Depreciation t 
A Louis d'or of 24 livres was worth in assignats. 

1789 Aug. 31 
Dec. 29 

1790 May 25 
Dec. 25 



1791 Jan. 29 26.2 

June 28 28 

Dec. 27 35.3 

1792 Jan. 31 38 

June 29 .... 40 

Nov. 30 .... 34.8 

1793 Jan. 29 43.8 

June 28 .... 72 

Oct. 8 81 

1794 Jan. 12 59.3 

June 9 80 

Nov. 28 .... 98 

Dec. 30 .... 120 

1796 Jan. 



1795 Feb. 24 
Mar. 26 
Apr. 23 







.... 137 





.... 750 

.... 868 

.... 1,145 

.... 1,560 

.... 3,096 

.... 4,100 

.... 5,068 
.... 6,610 
.... 7,100 
.... 5,950 
.... 8,300 

3 14,775 

5 i7»95o 

♦From A. Courtois, Histoire des banques en Prance, 2d ed., 1881, p. 329. 
tFrom A. Bailleul, Tableau complet de la valeur des assignats, des rescriptions 
et des mandats jour par jour depuis leur Amission, 11th ed., Paris, an V (1797). 


Great Britain 

The Bank Restriction 

Bank of Eng- 
land Notes in 

Circulation (in Price of Gold 
Million Pounds) ♦ per oz. t 
























Debt in 










571. 1 

621. 1 


813. 1 




*As of February in each year. From the Bank-Charter Committee Report, 
1831-1832, appendix No. 5. 

tFrom Tooke and Newmarch, History of Prices. 

tFrom W. S. Jevons, Investigations in Currency and Finance, 1884, p. 144. 
Prices of 1782 as 100. 

SFrom Report on Public Income and Expenditure from 1688-1801, 1869. 
Vol. n, appendix No. 12, National Debt., p. 298. 

810 21.0 



























Index No. 
of Prices! 





































Great Britain 

Public Debt* 
showing influence of wars. 




















774 127-2 

775 126.9 

783 231.8 

784 243.0 

792 239.7 







(In Millions of Pounds) 

31 War 






















793 247.9 


861. 1 

855 775-2 

856 803.9 

857 808.1 

869 749-3 

878 767-9 

879 770.1 

880 771-0 

881 769.9 

900 628.0 

901 628.9 

903 745-0 

904 770-8 

914 661.3 

916 1,108.9 

919 5.871-9 

920 7.434-9 

921 7.831-8 

♦Figures to 1869 from Report on Public Income and Expenditure from 
1688-1801, 1869, vol. ii. 

Figures from 1875 from Return on the National Debt, cd. 240, 1921. 




Public Debt * 

(In Million Francs) 

(Rentes Perpetuelles) Capital Total Debt 

1801 35.7 

181O 56.7 

1820 172.8 

1830 204.7 

1840 195-9 

1850 229.6 

i860 338.3 

1870 358.1 

1875 748.4 

1879 746.8 

1890 730.4 

1900 693.9 22,001.9 30»055.4 

1910 657.7 21,922.2 32,864.2 

1914 July 1 657.7 21,922.2 32,579-3 

1917 Dec. 1 124,338.4 

1919 Jan. I 147,472.4 

1920 Sept. 30 285,750.3 


1921 March 31 9,795-7 302,303.6 

^Arranged from the Bulletin de Statistique et de Legislation comparie and 
especially from La France financihe et iconomique, 1919. 



United States 

Depreciation of Greenbacks * 

Average Price of Gold Average Price of 

in Greenbacks Greenbacks in Gold 

1862 1 13.3 88.3 

1863 145-2 68.9 

1864 203.3 49.2 

1864 Maximum 285.0 Minimum 30.92 

1864 157.3 63.6 

1866 140.9 71 

1867 138.2 72.4 

1868 139-7 71-6 

1869 133. 75.2 

1870 1 14-9 87 

1 87 1 1 1 1.7 89.5 

1872 1 1 2.4 89.0 

1873 113-8 87.9 

1874 1 1 1.2 89.9 

1875 114-9 87 

1876 1 1 1.5 89.8 

1877 104.8 95.4 

1878 100.8 99.2 

1879 100 100 

'^From W. C. Mitchell, Gold Prices and Wages under the Greenback 
Standard, 1908, p. 4. 




United States 

Price Changes under the Greenback Standard * 

Wholesale Prices 





















Retail Prices 



















♦From W. C. Mitchell, Gold Prices and Wages under the Greenback 
Standard, 1908, p. 76. 




Public Debt and Gold Premium * 

(In Millions of Lire) 

PubUc Debt 

Interest Gold Premium on the 

(Rendite) Capital Paper Currency 

1861 148 3,092 1866 7.81 

1862 149 3,109 1867 7.37 

1863 186 3,832 1868 9.82 

1864 225 4,613 1869 3.94 

1865 262 5,347 1870 4.50 

1870 394 7»999 1871 5.35 

1875 438 8,829 1872 8.66 

1880 479 10,114 1873 14.21 

1885 520 11,143 1874 12.25 

1890 561 11,800 1875 8.27 

1895 609 12,257 1876 8.47 

1900 579 12,645 1877 9.63 

1905 566 12,705 1878 9.42 

1879 II. 19 

1915 May 13,636 1880 9.49 

1919 May 31 77*763 1881 1.88 

1920 Oct. 31.. 98,072 1882 2.65 

'^From J. Tivaroni, Storia del dehUo puhhUco del regno d'haHa, vol. ii, 





Paper Money, 1788-1817 * 

Assignats in Circulation 
(In Millions of Rubles) 



















Value of saver Ruble 

in Paper 










♦From P. Cahen, LabolUion du cours ford en Russie, 1905, p. 523. 





Paper Money and Public Debt, 1 844-1 897 

Circulation in 
Million Rubles 

1844 30-7 

1845 121. 8 

1848 289.6 

1850 300.3 

1855 356.3 

1858 735-3 

i860 678.2 

1865 679.6 

1870 721.8 

1875 797-3 

1877 790.1 

1878 IJ039.9 

1879 1,188.1 

1880 1,162.5 

1890 1,046.2 

1897 1,121.4 



Debt in 

Value of Paper Ruble 


in Coin Kopeks 























1 ,040.0 







^Frorn E. Lorini, L41 riforme moniiaire de la Russie, 1898, appendix. 





Paper Money, 1796-18 17 * 

Circulation in Value in Paper of 

MilUon Florins 100 Florins Silver 

796 46.8 100.25 

797 74.2 102 

798 91.9 lOI 

799 141 107 

800 200.9 1^5 

801 262 116 

802 337-2 120 

803 339.2 133 

804 337.6 135 

805 337-31 146 

806 449-8 175 

807 487.6 202 

808 524.2 222 

809 650.9 315 

810 995 552 

811 1,061 833 

8x2 212. 1 137 

813 295.6 183 

814 457-6 228 

815 610.1 351 

8x6 638.7 328 

817 428.7 333 

♦From A. de Miilinen, Les finances de VAuiriche, 1875, p. 124. 




Gold Premium, 1848-1892$ 

848 17* 1872 9.8t 

849 27 1873 lo.i 

850 50 1874 9-9 

851 34 

852 25 g j^ - 

853 16.7s ,8?6 19.6 

854 46.50 j8^^ 21.2 

1878 16.8 

855 29.25 g^ 8 

856 13.50 ^^ ^ 

857 9.33 

858 6.75 1880 15.9 

859 53.20 1881 15.3 

1882 17.3 

860 44.33 1883 17.5 

861 50.03 1884 19.4 

862 38.67 

863 18.34 1885 22 

864* 19.32 1886 


1887 23.7 

1888 23.3 

1889 • 17. 1 

865 14.28 

866 29.75 

867 30. 

868 18.75 

869 22.38 1890 14. 

870 25.40 1891 14.4 

871 20.02 1892 00.00 

^Figures from 1848-1871 represent the maximum premium. 

tFigures from 1872-1891 represent the average premium. 

tFrom P. Cahen, U abolition du cours ford en Russie et en Autriche, 1905, 
pp. 570, 571, 577. 




Depreciation of Paper Currency, 1 883-1910 * 

(In Million Pesetas) 

Bank Note Issues 
in Million Pesetas 



































*FTom F. Riihe, Des Geldwesen SparUetu, 1912, p. 291. 

Value of 100 f r. Spede 
in Paper Pesetas 














Cf. Gil y PaUos, 

Estudios sobre la moneda y los cambios, 1906, appendix, pp. 366-367. 


2 <- 

^ o 

« w 

■J s 

n 9 









— C 

O & 3 


y 2 








— =E 


11 1 




I- o 






The American Revolution 

Webster, Pelatiah — Political Essays on the Nature and 
Operation of Money, Public Finance and other Sub- 
jects. Philadelphia, 1791. 

Phillips, Henry, Jr. — Historical Sketches of American 
Paper Currency. 2 vols. Roxbury, 1 865-1 866. 

France in the Eighteenth Century 

Levasseur, E. — Recherches historiques sur le systeme de 

Law. Paris, 1854. 
McFarland, Davis A. — ^An Historical Study of Law's 

System. In Quarterly Journal of Economics. 1887. pp. 

289 and 420. 
Marion, M. — Histoire financiere de la France depuis 

171^. Tome iii, La vie et la mort du papier monnaie. 

Pans, 192 1. 
White, A. D. — Paper Money Inflation in France : How it 

came. What it brought, and How it ended. New York, 


Great Britain 

Cannan, Edwin — The Paper Pound of 1 897-1 821. Lon- 
don, 19 19. 

WoLTER, JOHANNES — Das staatliche Geldwesen Englands 
zur Zeit der Bank-Restriction, 1797-1821. Strassburg, 

Report of the Secretary and Comptroller General of the 
Proceedings of the Commissioners for the Reduction 
of the National Debt from 1 789-1 890. London, 1891. 

United States 

Mitchell, W. C. — A History of the Greenbacks with es- 

?ecial Reference to the Economic Consequences of their 
ssue. Chicago, 1903. 
Mitchell, W. C. — Gold, Prices and Wages under the 
Greenback Standard. Berkeley, 1908. 

*0nly the two or three best works on each country are given. 




VuHRER, A. — Histoire de la dette publique en France. 2 

vols., Paris, 1886. 
GuTMANN, F. — Das Franzosische Geldwesen im Kriege, 

1870-1878. Strassburg, 1913. 


Plebano, a. — Storia della finanza Italiana. 3 vols. Turin, 

TlVARONi, J. — Storia del debito pubblico del regno d'ltalia. 

2 vols. Pavia, 1908-10. 
SuPiNO, C. — La carta moneta in Italia. Turin, 1921. 
Franz, E. — Die Verfassung der staatlichen Zahlungsmittel 

Italiens seit 1861. Strassburg, 191 1. 


Lorini, E. — La questione della valuta in Austria-Ungheria. 

Crowned by the Austrian and Italian Governments. 

Rome, 1893. 
Spitz-Muller, a. — Die Oesterreichisch-Ungarische Wah- 

rungsreform. Leipsic, 1902. 


Cahen, p. — L'abolition du cours force en Russie et en 

Autriche. Paris, 1905. 
LoRiNi, E. — La reforme monetaire de la Russie. Trad, de 

R. Ledos de Beaufort. Paris, 1898. 


Gil y Pablos, D. Francisco — Estudios sobre la moneda y 

los cambios. Madrid, 1906. 
Fochier, E. — La circulation fiduciaire et les crises du 

change en Italic et en Espagne. Paris, 1905. 
Ruhe, F. — Das Geldwesen Spaniens seit dem Jahre 1772. 

Strassburg, 191 2. 




Williams, J. H. — ^Argentine International Trade under 

Inconvertible Paper Money. Cambridge, 1920. 
Arias, D. M. — Historia del papel moneda de Argentina. 

Buenos Aires, 191 2. 
PiNERO, O. M. — La conversion del billete. Contribucion 

al estudio de nuestras reformas monetarias. Buenos 

Aires, 1899. 
Wolff, J. — Die Argentinische Wahrungsreform von 1899. 

Strassburg, 1905. 


SuBERCASEAUZ, G. — El papel moneda en Chile. San- 
tiago, 1908. 
SuBERCASEAUZ, G. — Le papier monnaie. Paris, 1920. 


Calogeras, J. P. — La politique monetaire du Bresil. Rio 

de Janeiro, 19 10. 
SouTO, V. — Caixa de conversao. Rio de Janeiro, 1906. 
Cavalcanti, a. — O meio circulante nacional. Rio de 

Janeiro, 1893. 

Other South American Countries 

Garland, A. — La moneda en el Peru. Lima, 1908. 
Solano, A. — Apuntaciones sobre el papel moneda. 

Bogota, 1907. 
AcEVEDO, E. — Contribucion al estudio de la historia econ- 

omica y financiera de la repiiblica oriental del Uruguay. 
2 vols. Montevideo, 1903. 


Takaki, a. — The History of Japanese Paper Currency. 
In Johns Hopkins University Studies in Historical and 
Political Science. Series xxi. Baltimore, 1903. 

Jernigan, T. R. — United States Consular Reports, no. 68, 
Washington, 1886. 


Other Works by the Same Author 

Principles of Economics. 9th Ed. 1921. 

Russian Translation, 1907; Japanese Translation, 1907; 
French Translation, 1921. 

Essays in Taxation. 9th Ed. .1921. 

Japanese Translation, 1909; French Translation, 1910; 
Mahratti Translation, 1 910. 

The Shifting and Incidence of Taxation. 4th Ed. 192 1. 

Italian Translation, 1906; French Translation, 1911; 
Japanese Translation, 1910. 

The Income Tax. 2nd Ed. 1914. 
French Translation, 1913. 

The Economiclnterpretation of History. 2nd Ed. 1907. 

Japanese Translation, 1905; Russian Translation, 1906; 
Spanish Translation, 1907; French Translation, 1910; 
Armenian Translation, 1921. 

Progressive Taxation in Theory and Practice. 

2nd Ed. 1908. 

French Translation, 1900; Spanish Translation, 1913. 
Railway Tariffs and the Interstate Commerce Law. 
Owen and the Christian Socialists.